Reference no: EM132472095

Patriot Industries Inc. is evaluating whether to sell an old machine and purchase a new machine:

	Old Machine	New Machine
Acquisition cost	$180,000	$200,000
Useful life	5 years	3 years
Remaining useful life	3 years	3 years
Current trade-in value	$80,000	NA
Salvage after use	$5,000	$15,000
Annual operating costs	$55,000	$15,000
Defect rate per year	3%	1%

Annual production for both machines is 250,000 units. Rework costs are $1.50 per unit

Question 1: Should Patriot buy the new machine? Ignoring the effects of the time value of money, what is the net cash flow resulting from the acquisition of the new machine?

a. Yes, $32,500

b. No, $32,500

c. Yes, $45,000

d. No, $45,000

Question 2: How would net cash flow from the acquisition of the new machine change if: Cash flow would: The acquisition cost of the old machine is $200,000 (instead of $180,000)

a. Be Higer

b. Be lower

c. Would not change

Question 3: How would net cash flow from the acquisition of the new machine change if: Cash flow would: The disposal value of the old machine is $100,000 (instead of $80,000)

a. Be Higer

b. Be lower

c. Would not change