Manifest Company Is Evaluating a Proposal to Purchase a New

Manifest Company is evaluating a proposal to purchase a new machine that would cost $50,000 and have a salvage value of $6,000 in 5 years. The new machine will provide savings of $7,000 in operating costs when compared to that of the existing machine (which has operating costs of $27,000). If Manifest purchases the new machine, it will sell the old one for its current salvage value of $7,000. If Manifest does not purchase the new machine, it will dispose of the old machine in 5 years at an estimated value of $2,000. The old machine's present book value is $25,000. The old machine will require repairs estimated at $20,000 in one year. Manifest's cost of capital is 12 percent.
Additional information for a 12 percent time value of money:
$$\begin{array} { l l } \text { Present value of } \$ 1-\text { Year 1 } & 0.89286 \\\text { Present value of } \$ 1-\text { Year 5 } & 0.56743 \\\text { Present value of an annuity of } \$ 1,5 \text { periods } & 3.60478\end{array}$$ Required:
a. Use the total cost approach to evaluate the alternatives of keeping the old machine and purchasing the new machine. Indicate which alternative is preferred.
b. Use the differential cost approach to evaluate the desirability of purchasing the new machine. Indicate which alternative is preferred.