Mick Greene Co. (MG) is considering the replacement of some equipment that has a book value equal to zero and a current market value of $4,600. One possible alternative is to invest in new equipment that costs $20,000. The new equipment has a three-year service life and an estimated salvage value of $5,000, will produce annual cash operating savings of $10,800, and will require a $4,500 overhaul in year 2. The company uses straight-line depreciation.
Required:
Prepare a net-present-value analysis of MG's replacement decision, assuming a 12% hurdle rate and no income taxes. Should the equipment be acquired? Note: Round calculations to the nearest dollar.

Question

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The Answer of Mick Greene Co. (MG) is considering the replacement of some equipment that has a book value equal to zero and a current market value of $4,600. One possible alternative is to invest in new equipment that costs $20,000. The new equipment has a three-year service life and an estimated salvage value of $5,000, will produce annual cash operating savings of $10,800, and will require a $4,500 overhaul in year 2. The company uses straight-line depreciation.
Required:
Prepare a net-present-value analysis of MG's replacement decision, assuming a 12% hurdle rate and no income taxes. Should the equipment be acquired? Note: Round calculations to the nearest dollar.