Hughes Corporation is considering replacing a machine used in the manufacturing process with a new, more efficient model. The pu
rchase price of the new machine is $150,000 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 five years. However, the annual operating costs of the old machine are $18,000 compared to $10,000 for the new machine. Also, the new machine has a salvage value of $25,000, but the old machine will be worthless at the end of the five years. You are deciding whether the company should sell the old machine and purchase the new model. You have determined that an 8% rate 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. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. What is the incremental cash outflow required to acquire the new machine
Hughes Corporation can calculate the incremental cash outflow required to acquire the new machine by just deducting the sales proceeds from the cost of the new machine.
DATA
New machine = $150,000
Old machine = 100,000
Cash outflow per year (18,000 - 10,000) = 8,000
Salvage value = 25,000
Annuity factor = 8%
Solution
Incremental Cash outflow = Cost of new machine - Sales proceeds from old machine
