Equipment Replacement and Strategic Considerations The management of Devine Instrument Company is considering the purchase of a new drilling machine, model RoboDril 1010K. According to the...

Equipment Replacement and Strategic Considerations The management of Devine Instrument Company is considering the purchase of a new drilling machine, model RoboDril 1010K. According to the specifications and testing results, RoboDril will substantially increase productivity over AccuDril X10, the machine Devine is currently using. The AccuDril was acquired 8 years ago for $120,000 and is being depreciated using the straightline method over a 10-year expected life and an estimated salvage value of $20,000. The engineering department expects the AccuDril to keep going for another 3 years after a major overhaul at the end of its expected useful life. The estimated cost for the overhaul is $100,000. The overhauled machine will be depreciated using straight-line depreciation with no salvage value. The overhaul will improve the machine’s operating efficiency approximately 20% for each of years 3, 4, and 5. No other operating conditions will be affected by the overhaul. RoboDril 1010K is selling for $250,000. Installing, testing, rearranging, and training will cost another $30,000. The manufacturer is willing to take the AccuDril as a trade-in for $40,000. The RoboDril will be depreciated using the straight-line method with no salvage value. New technology most likely will make RoboDril obsolete to the firm in 5 years. Variable operating cost for either machine is the same: $10 per machine hour (cash-based). Other pertinent data follow:

Required 1. Determine for each of years 0 though 5 (inclusive) the after-tax cash flows for items that differ between the two alternatives. Express all cash flow amounts in thousands (000s); round individual amounts to 1 decimal place.  2. Compute the payback period (in years) for purchasing RoboDril 1010K rather than having AccuDril X10 overhauled in 2 years. Assume for this calculation only that all cash flows (other than those related to the net acquisition cost of the replacement asset)—including tax effects—occur evenly throughout the year. Round your answer to 1 decimal place (e.g., 2.812 years = 2.8 years).  3. Using results generated in requirement 1, what is the present value of each decision alternative, keep vs. replace? State all cash flows in thousands (000s); round each of your two answers to 1 decimal place. (Use the built-in NPV function in Excel to calculate present values.)  4. What other factors, including strategic issues, should the firm consider before making a final decision?