Question

Bonds Ginormous Hats is interested in replacing its hat molder with a new improved model. The molder has a salvage value of $5,000 now and a zero salvage value of in five years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $8,000. The new machine costs $35,000 and has a predicted salvage value of $7,000 at the end of five years. The new machine will generate cash savings of $9,000 per year. The company will have to invest $5,000 in specialized spare parts for the new machine as working capital. The working capital will be released at the end of five years for investment elsewhere. Required: 1. What is the net present value of purchasing the new machine if the company has a required rate of return of 12 percent? 2. Should management replace the hat molder? Explain your response

Answer 1

Cash flow	FV	N	PV factor	Present value
New machine	-35000	0	1	-35000
Working capital	-5000	0	1	-5000
Salvage of old machine	5000	0	1	5000
Working capital release	5000	5	0.56742	2837.1
Salvage of new machine	7000	5	0.56742	3971.94
Avoidance of rebuilding	8000	1	0.89285	7142.8
Annual expense	9000	1 to 5 year	3.60475	32442.75
				11394.59

the net present value of purchasing the new machine if the company has a required rate of return of 12 percent would be $ 11,395

Yes, of course, the management shall replace the hat molder as there is net present value .