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Information regarding two different models

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You run an ice cream shop on Darby Street and you have used the current ice cream maker "Ice-20" for almost 7 years. The machine is slowing down and therefore you would like to consider the replacement of the existing machine. After conducting market research, you find the advanced model, "Ice-100" suitable for your business. The information regarding two different models is given below:

Machine Ice-20 Machine Ice-100

Costs 2 million Costs 2.5 million

Annual cash flow 450,000 Annual cash flow 650,000

Remaining Life 4 years Estimate life 8 years

Residual value now 500,000 Residual value after 8 years of operation 800,000

Residual value in 4 years 250,000

You are considering the following alternatives:

a. Replace the model "Ice-20" with "Ice-100" now

b. Replace the model "Ice-20" with "Ice-100" in 4 years' time

Suppose the required rate of return is 10% p.a., please advise which alternative the ice cream shop should adopt.

Reference no: EM132638324

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