Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following information has been gathered relative to this decision:
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Equipment
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New
|
|
Purchase cost new
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$50,000
|
Equipment
|
|
Remaining book value
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$30,000
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$48,000
|
|
Cost to rebuild now
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$25,000
|
|
|
Major maintenance at the end of 3 years
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$8,000
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$5,000
|
|
Annual cash operating costs
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$10,000
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$8,000
|
|
Salvage value at the end of 5 years
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$3,000
|
$7,000
|
|
Salvage value now
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$9,000
|
|
Carlson uses the total cost approach and a discount rate of 12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson Manufacturing plans to close its domestic manufacturing operations and to move these operations to foreign countries.
1. If the new equipment is purchased, the present value of all cash flows that occur now is:
A) $(48,000)
B) $(39,000)
C) $(41,000)
D) $(37,000)
2. If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is:
A) $(28,840)
B) $(19,160)
C) $(14,420)
D) $(36,050)
3. If the equipment is rebuilt, the present value of all cash flows that occur now is:
A) $(55,000)
B) $(25,000)
C) $(16,000)
D) $(23,000)