X Company is considering replacing one of its machines in order to save operatin
ID: 2453288 • Letter: X
Question
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $64,000 per year; operating costs with the new machine are expected to be $48,000 per year. The new machine will cost $67,000 and will last for 5 years, at which time it can be sold for $2,000. The current machine will also last for 5 more years but will not be worth anything at that time. It cost $42,000 four years ago, but its current disposal value is only $8,000. Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine with the new machine?
Explanation / Answer
incremental net present value of replacing the current machine with the new machine is $8,029.13 Statemnet showing Cash flows Particulars Time PVf@7% Amount PV Cash Outflows - 1.00 (59,000.00) (59,000.00) PV of Cash outflows (59,000.00) Cash inflows( Incremental Cost Savings) 1.00 0.9346 16,000.00 14,953.27 Cash inflows( Incremental Cost Savings) 2.00 0.8734 16,000.00 13,975.02 Cash inflows( Incremental Cost Savings) 3.00 0.8163 16,000.00 13,060.77 Cash inflows( Incremental Cost Savings) 4.00 0.7629 16,000.00 12,206.32 Cash inflows( Incremental Cost Savings) 5.00 0.7130 16,000.00 11,407.78 Cash inflows( Sale value of New Machine) 5.00 0.7130 2,000.00 1,425.97 PV of Savings 67,029.13 NPV 8,029.13 Operating costs of Old Machine 64,000.00 Operating costs of New Machine 48,000.00 Incremental Costs Savings 16,000.00 Purchase of new Machine 67,000.00 Disposal Of Old Machine 8,000.00 Net investment 59,000.00
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