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Replacement decision for relevant cost schedules

The managers of ABC co. are considering replacing an industrial mixer used in the company's factory. The company's cost of capital is 10%.

Information about the old mixer:
Cost: $28,000
Estimated useful life: 10 yrs
Estimated residual value: 0
current age: 5 years
estimated current fair value: $8,000
Annual operating cost: $18,000

Information about the new mixer:
Cost: $34,000
Estimated useful life: 5 years
Estimated residual value: 0
Annual operating cost: $12,000

a. Prepare a relevant cost schedule showing the benefit of buying the new mixer.
b. How much must the company invest today to replace the industrial mixer?
c. If the new mixer is purchased, how much would be saved in operating costs each year?
d. How much would the company receive at the end of the five-year useful life of the new mixer?
e. Calculate the net present value of replacing the old mixer.
f. Do you think the company should replace the old mixer?

Please be very specific and show all calculations so I can learn.

Solution Preview

Please see attached file.

The managers of ABC co. are considering replacing an industrial mixer used in the company's factory. The company's cost of capital is 10%.

Information about the old mixer:
Cost: $28,000
Estimated useful life: 10 yrs
Estimated residual value: 0
current age: 5 years
estimated current fair value: $8,000
Annual operating cost: $18,000

Information about the new mixer:
Cost: $34,000
Estimated useful life: 5 years
Estimated residual value: 0
Annual operating cost: $12,000

a. Prepare a relevant cost schedule showing the benefit of buying the new mixer.
b. How much must the company invest today to replace the industrial mixer?
c. If the new mixer is purchased, how much would be saved in operating costs each year?
d. How much would the company receive at the end of the five-year useful life of the new mixer?
e. Calculate the net present value of replacing the old mixer.
f. Do you think the company should replace the old mixer?

a. Prepare a relevant cost schedule showing the benefit of buying the new ...

Solution Summary

Analyses a replacement decision: benefit of buying the new mixer.

$2.19