Clean Duds Laundromat has an industrial water softener that enhances the water quality used in its washing machines

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Clean Duds Laundromat has an industrial water softener that enhances the water quality used

in its washing machines. The water softener is approaching the end of its useful life and must

 

be either overhauled or replaced. Details of the two alternatives are shown below.

 

   If the company overhauls its current water softener, then it will be usable for eight more

 

years. If, instead, a new water softener is purchased, it will be used for eight years, after which

 

it will be replaced. The new water softener will be considerably more energy efficient, resulting

 

in a substantial reduction in annual operating costs, as shown below:

 

 

 

                                             Current water softener    New water softener

 

Purchase cost new                               $10,000                $13,000

 

Remaining book value                             $6,500                    — 

 

Overhaul needed now                             $5,000                    — 

 

Annual cash operating costs                       $7,000                  $5,100 

 

Salvage value now                                $2,400                    — 

 

Salvage value eight years from now                 $1,200                  $3,400 

 

 

 

Clean Duds computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 15% discount rate.

 

 

 

Required:

 

(Ignore income taxes.)

 

1-a. Determine the present value of net cash flows using the total-cost approach. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Enter any cash outflows with a minus sign. Do not round intermediate calculations and round final answers to the nearest dollar amount.)

 

 

 

                                 Pv of net cash flow 

 

Purchase the new softener         $?

 

upgrade and keep the old softener   $?

 

 

 

1-b. Should Clean Duds Laundromat upgrade the old water softener or purchase the new one?

 

 

 

2. Using the incremental-cost approach, determine the net present value in favor of (or against) purchasing the new water softener? (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and round final answer to the nearest dollar amount.)