Three years ago, Astro Masters, Inc. purchased the three assets listed in the following table. The chief financial officer, Bill Moss, is presently trying to decide what to do with each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it and replace it with an equivalent asset. The following information is provided to aid his decision.
$\begin{array}{|c|c|c|c|c|c|}
\hline \text { Asset } & \begin{array}{c}
\text { Original } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Replacement } \
\text { Cost }
\end{array} & \begin{array}{c}\text { Fair }\
\text { Market } \
\text { Value }
\end{array} & \begin{array}{c}
\text { PresentValue of Future } \
\text { Cash Flows Produced } \
\text { by Old Asset }
\end{array} & \begin{array}{c}
\text { Present Value of } \
\text { Future Cash Flows } \
\text { of Equivalent Asset }
\end{array} \\hline \mathrm{A} & \$ 4,500 & \$ 1,500 & \$ 2,000 & \$ 3,000 & \$ 5,000 \
\hline \mathrm{B} & \$ 2,000 & \$ 2,500 & \$ 1,000 & \$ 3,000 & \$ 4,500 \
\hline \mathrm{C} & \$ 2,500 & \$ 4,000 & \$ 3,500 & \$ 3,000 & \$ 6,000 \
\hline
\end{array}$
Based on your calculations of total cash flows, which of the following options is the best for Bill to pursue with respect to Asset A?

Question

Quizplus · Accepted Answer

For Asset A, selling and replacing it yields a total cash flow of $2,000 (from selling) + $5,000 (future cash flows of the new asset) - $1,500 (cost of replacement) = $5,500. Keeping it yields $3,000 (future cash flows of the old asset), which is less than the total cash flow from selling and replacing. Therefore, option 3 is the best.

Three Years Ago, Astro Masters, Inc Based on Your Calculations of Total Cash Flows, Which of Listed