Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following information has been gathered relative to this decision: Carlson uses the total cost approach to net present value analysis and a discount rate of 12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson Manufacturing will have no future use for the equipment. If the new equipment is purchased, the present value of the cash flows that occur now is:

Question

Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following information has been gathered relative to this decision:  Carlson uses the total cost approach to net present value analysis and a discount rate of 12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson Manufacturing will have no future use for the equipment. If the new equipment is purchased, the present value of the cash flows that occur now is:

Quizplus · Accepted Answer

Using the total cost approach to net present value analysis and a discount rate of 12%, the present value of the cash flows for rebuilding the equipment is ($47,730) and the present value of the cash flows for replacing the equipment is ($39,213). Therefore, replacing the equipment is the better choice.

Carlson Manufacturing Has Some Equipment That Needs to Be Rebuilt