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    Relevant Information, Net Present Value, and Screen Project

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    The managers at ABV are considering replacing the industrial lathe used in the company's factor. The company's cost of capital is 12%.

    Information about lathe:
    Cost $57,000
    Estimated useful life 8 yrs
    Estimated residual value 0
    Current age 2 years
    Estimated current fair value $32,000
    Annual operating cost $32,000

    Information about the new lathe:
    Cost $61,000
    Estimated useful life 6 years
    Estimated residual value 0
    Annual operating cost $24,000

    a. Prepare a relevant cost schedule showing the benefit of buying the new lathe (ignore the time value of money).
    b. How much must the company invest today to replace the old lathe?
    c. If the company replaces the old lathe, how much will be saved in operating costs each year?
    d. Calculate the net present value of replacing the old lathe.
    e. Do you think the company should replace the old lathe?

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    Solution Preview

    Please see the attached document for more in-depth steps and a properly formatted solution.
    a. Prepare a relevant cost schedule showing the benefit of buying the new lathe. (For this requirement, ignore the time value of money.)
    Old Operating costs = 32000
    Less New Operating cost = 24000
    Savings 8000 (Old Operating ...

    Solution Summary

    This solution provides guidelines on preparing a relevant cost schedule and the investment going into the production of the new lathe.