(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision: Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years Mr. Lichty plans to close the car wash and retire.
-If the new equipment is purchased,the present value of the annual cash operating costs associated with this alternative is:

Question

(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision:  Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years Mr. Lichty plans to close the car wash and retire.
-If the new equipment is purchased,the present value of the annual cash operating costs associated with this alternative is:

Quizplus · Accepted Answer

The present value of the annual cash operating costs associated with the alternative of purchasing new equipment can be calculated using the present value formula:

PV = (CF1/1+r) + (CF2/ (1+r)^2) + ... + (CFn/ (1+r)^n)

Where CF represents the annual cash flow, r represents the discount rate, and n represents the number of years.

Using the given data, we can calculate the present value of the annual cash operating costs associated with purchasing new equipment as follows:

PV = (8,500/1+0.12) + (9,500/ (1+0.12)^2) + (10,000/ (1+0.12)^3) + (11,000/ (1+0.12)^4) + (12,000/ (1+0.12)^5)

PV = $37,901

Since the present value of the annual cash operating costs associated with purchasing new equipment is positive, this alternative is not the best choice. The best choice is to stick with the existing equipment.

(Ignore Income Taxes in This Problem