Judgment Case: Replacement Decision
Hughes Corporation is considering replacing a machine used in the manufacturing process with a newt more efficient model. The purchase price of the new machine is 51$0.000 and the old machine can be sold for $100.000. Output for the two machines is identical: they will both be used to produce the same amount of product for Ave years. However, the annual operating costs of the old machine are $15.000 Compared to $10.000 for the new machine. Also, the new machine has a salvage value of 525.000, but the old machine will be worthless at the end of I be Ave years.
You are deciding whether the company should sell the old machine and purchase the new model. You have determined that an 5% late properly reflects the time value of money in this situation and that all operating costs are paid at the end of the year. For this initial comparison you ignore the effect of the decision on income taxes.
Required:
• What is the incremental cash outflow required to acquire the new machine?
• What is the present value of the benefits of acquiring the new machine?
The response must include a reference list. One-inch margins, double-space, Using Times New Roman 12 pnt font and APA style of writing and citations.