Reference no: EM133044718

Problem - Clean Duds Laundromat has an industrial water softener that enhances the water quality used in its washing machines. The water softener is approaching the end of its useful life and must be either overhauled or replaced. Details of the two alternatives are shown below. If the company overhauls its current water softener, then it will be usable for eight more years. If, instead, a new water softener is purchased, it will be used for eight years, after which it will be replaced. The new water softener will be considerably more energy efficient, resulting in a substantial reduction in annual operating costs, as shown below:

	Current Water Softener	New Water Softener
Purchase cost new	$24,000	$34,000
Remaining book value	$20,500	-
Overhaul needed now	$12,000	-
Annual cash operating costs	$14,000	$9,300
Salvage value now	$5,200	-
Salvage value eight years from now	$2,600	$6,200

Clean Duds computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 12% discount rate.

Required -

1-a. Determine the present value of net cash flows using the total-cost approach.

1-b. Should Clean Duds Laundromat upgrade the old water softener or purchase the new one?

2. Using the incremental-cost approach, determine the net present value in favor of (or against) purchasing the new water softener?