Solution-Evaluate the alternatives of keeping the old

Evaluate the alternatives of keeping the old compressor

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Reference no: EM133186696

Question - Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $160,000 and have a salvage value of $16,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $18,000, as follows:

	Old Compressor	New Compressor
Salaries	$48,000	$60,000
Supplies	9,600	6,000
Utilities	18,400	12,000
Cleaning and maintenance	28,000	8,000
Total cash expenditures	$104,000	$86,000

If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $48,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $4,800. The old compressor's present book value is $68,000. If kept, the old compressor will require repairs one year from now predicted to cost $60,000.

Required -

a. Use the total cost approach to evaluate the alternatives of keeping the old compressor and purchasing the new compressor. Indicate which alternative is preferred.

b. Use the differential cost approach to evaluate the desirability of purchasing the new compressor.

Reference no: EM133186696

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Evaluate the alternatives of keeping the old compressor

Reference no: EM133186696

Reference no: EM133186696

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