luchty 461122

(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision:

Present Equipment New Equipment

Purchase cost new 47,000 45,000

Remaining book value 20,000 none

Cost to rebuild now 20,000 none

Major maintenance at the end of 3 year 5,000 3,000

Annual cash operating cost 9,000 7,000

Salvage value in 5 years 2,000 6,000

Salvage value now 8,000 none

Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years Mr. Lichty plans to close the car wash and retire.

If the new equipment is purchased, the present value of all cash flows that occur now is:

a. $(45,000)

b. $(39,000)

c. $(37,000)

d. $(34,000)