Manifest Company is evaluating a proposal to purchase a new machine that would cost $60,000 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.
Required:
a. Use the total cost approach to evaluate the alternatives of keeping the old machine and purchasing the new machine, using a spreadsheet or financial calculator. Indicate which alternative is preferred.
b. Use the differential cost approach to evaluate the desirability of purchasing the new machine, using a spreadsheet or financial calculator. Indicate which alternative is preferred.

Question

Manifest Company is evaluating a proposal to purchase a new machine that would cost $60,000 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. 
Required:
a. Use the total cost approach to evaluate the alternatives of keeping the old machine and purchasing the new machine, using a spreadsheet or financial calculator. Indicate which alternative is preferred.
b. Use the differential cost approach to evaluate the desirability of purchasing the new machine, using a spreadsheet or financial calculator. Indicate which alternative is preferred.

Quizplus · Accepted Answer

The Answer of Manifest Company is evaluating a proposal to purchase a new machine that would cost $60,000 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. 
Required:
a. Use the total cost approach to evaluate the alternatives of keeping the old machine and purchasing the new machine, using a spreadsheet or financial calculator. Indicate which alternative is preferred.
b. Use the differential cost approach to evaluate the desirability of purchasing the new machine, using a spreadsheet or financial calculator. Indicate which alternative is preferred.

Manifest Company Is Evaluating a Proposal to Purchase a New