X Company is considering replacing one of its machines in order to save operatin

Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $63,000 per year; operating costs with the new machine are expected to be $42,000 per year. The new machine will cost $69,000 and will last for 7 years, at which time it can be sold for $2,500. The current machine will also last for 7 more years but will not be worth anything at that time. It cost $41,000 four years ago, but its current disposal value is only $5,000. Assuming a discount rate of 9%, what is the incremental net present value of replacing the current machine with the new machine?

Explanation / Answer

Option 1 Particulars Year Cash Flows PVF @ 9% Project A Cost of replacing machine ( 69000-5000) 0 -64000 1 -64,000.00 Savings in operating costs ( 63000-42000) 1 21000                         0.92    19,266.06 Savings in operating costs ( 63000-42000) 2 21000                         0.84    17,675.28 Savings in operating costs ( 63000-42000) 3 21000                         0.77    16,215.85 Savings in operating costs ( 63000-42000) 4 21000                         0.71    14,876.93 Savings in operating costs ( 63000-42000) 5 21000                         0.65    13,648.56 Savings in operating costs ( 63000-42000) 6 21000                         0.60    12,521.61 Savings in operating costs ( 63000-42000) 7 21000                         0.55    11,487.72 Salvage value 7 2500                         0.55      1,375.00 Net Present Value    43,067.01

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