Question

Rembrandt Reproduction Company is considering replacing a special printer the company uses to make high quality prints of famous paintings. Selected information about the two alternatives is given below:

	Old Printer	New Printer
Original Cost	$17,000	$25,000
Accumulated Depreciation	12,000	N/A
Current Resale Value	6,000	N/A
Annual Operating Cost	13,000	10,000
Remaining Useful Life	8 years	8 years

*please show calculations*

(1) Rembrandt Reproductions will:

1. opt to buy the new machine because the net advantage over eight years of doing so is $5,000
2. opt to buy the new machine because the annual operating cost savings are $3,000
3. opt to use the old machine because it cost less than the new machine
4. opt to use the old machine because the net disadvantage over eight years of buying the new machine is $1,000

(2) If Rembrandt Reproductions opts to replace its printer, the payback period on the new printer is:

1. 2.5 years
2. 8.3 years
3. 8.0 years
4. 6.5 years
5. 6.3 years

(3) Rembrandt Reproduction's accountant just completed a finance seminar at Santa Monica College. She wants to apply a more rigorous analytical technique to evaluating the above proposal. Specifically, she intends to calculate the proposal's net present value. She uses a rate of 7% to discount the proposal's cash flows. On the basis of the accountant's analysis, Harrison will:

1. ignore the net present value analysis because the selling the old machine results in a $1,000 gain
2. opt to use the old machine because the net present value of buying the new machine is negative
3. opt to buy the new machine because the net present value of replacing the old machine is positive

Answer 1

1.)

initial investment on new machine = cost of new - resale value of old = 25000 -6000 = 19000

advantafe of using new machine for 8 years = 3000 * 8 = 24000

net advanatge is 24000 - 19000 = $5000

correct option is A

2.)

payback period = initial investment / savings per year = 19000 / 3000 = 6.333 years

correct option is E

3.

calcualtion of present value of cash flow from new machine = pvaf(7%,8years) * 3000

5.9713 * 3000 = 17914

npv = present value of cash inflow - cash outflow = 17914 - 19000 = -1086

correct option is therefore B