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Managerial Accounting

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Calculating Net Present Values

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Whitfield Corp. has just installed a new machine. The machine cost \$47,000. Its annual operating costs are \$28,000, exclusive of depreciation. The machine will have an 8-year life with a residual value of zero. One month after the purchase of this machine, a different company offered a new machine that will reduce the annual operating costs to \$16,000, exclusive of depreciation. The new machine has a cost of \$72,000.

The "old" machine can be sold outright for \$24,000. The new machine has an 8-year useful life and a salvage value of \$4,000. Cash sales will be \$220,000, and other cash expenses will be \$140,000 for each of the next eight years, regardless of this decision.

Calculate net present values (in $) of each alternative using a 12% desired rate of return, and determine what should be done.

(I) Net present value of outflows for the "old" machine

(II) Net present value of outflows for the new machine

(III) Should Whitfield Corp. buy new or keep "old"