Razorback Manufacturing is considering replacing a broken metal cutting machine. Several options have been proposed.Option 1: The broken machine can be sold today for $3,000.Option 2: It can be overhauled completely for $7,000, after which it willproduce $2,500 in annual cash flows over the next five years. The resalevalue of the asset at the end of five years is zero.Option 3: It can be replaced for $18,000. The life of the replacement machine is five years, and it has an estimated salvage value of $2,000 at the end of five years. The anticipated operating cash inflows for each year will be $5,000. If the firm's required rate of return of 12%, what should Razorback do?
Razorback Manufacturing is considering replacing a broken metal cutting machine. Several options have been proposed.
Option 1: The broken machine can be sold today for $3,000.
Option 2: It can be overhauled completely for $7,000, after which it will
produce $2,500 in annual cash flows over the next five years. The resale
value of the asset at the end of five years is zero.
Option 3: It can be replaced for $18,000. The life of the replacement machine is five years, and it has an estimated salvage value of $2,000 at the end of five years. The anticipated operating
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