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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%.

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

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?

#### 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.

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