The management of opry company a wholesale distributor of

Reference no: EM13576770

Eastbay Hospital has an auxiliary generator that is used when power failures occur. The generator is worn out and must be either overhauled or replaced with a new generator. The hospital has assembled the following information:

	Present Generator		New Generator
Purchase cost	$	16,000	$	20,000
Remaining book value	$	9,000		-
Overhaul needed now	$	8,000		-
Annual cash operating costs	$	12,500	$	7,500
Salvage value-now	$	4,000		-
Salvage value-eight years from now	$	3,000	$	6,000

If the company keeps and overhauls its present generator, then the generator will be usable for eight more years. If a new generator is purchased, it will be used for eight years, after which it will be replaced. The new generator would be diesel-powered, resulting in a substantial reduction in annual operating costs, as shown above.

The hospital computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 16% discount rate. (Ignore income taxes.)

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Required:

1a.	Determine the net present value using the total-cost approach. (Negative amounts should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)

	Net Present Value
Purchase new generator	$
Overhaul and keep old generator	$

1b.

Should Eastbay Hospital keep the old generator or purchase the new one?

	Purchase the new generator
	Keep the old generator

2.	Using the incremental approach, determine the net present value in favor (or against) purchasing the new generator? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)

Net present value

The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $41,000 machine that would reduce operating costs in its warehouse by $5,800 per year. At the end of the machine's 10-year useful life, it will have no scrap value. The company's required rate of return is 10%. (Ignore income taxes.)

Click here to view Exhibit 11B-2, to determine the appropriate discount factor(s) using table.

Required:
1.	Determine the net present value of the investment in the machine. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)

Net present value

2.	What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?

Net cash flow

Reference no: EM13576770

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