(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)