Lichty uses the total-cost approach and a discount rate of

Reference no: EM13568963

Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision:

Present Equipment New Equipment
Purchase cost new $64,500 $59,000
Remaining book value $21,400
Cost to rebuild now $21,400
Major maintenance at the end of 3 years $5,700 $3,700
Annual cash operating costs $12,500 $9,100
Salvage value in 5 years $3,400 $10,200
Salvage value now $13,600

Lichty uses the total-cost approach and a discount rate of 12% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of four years Mr. Lichty plans to close the car wash and retire.

If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is:
$(27,637)

$(38,874)

$(16,400)

$(17,311)

Reference no: EM13568963

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