X Company must decide whether to continue using its current equipment or replace

Question

X Company must decide whether to continue using its current equipment or replace it with new, more efficient equipment. The following information is available for the current and new equipment:

The current and new equipment will last for 6 years. If X Company replaces the current equipment, what is the approximate internal rate of return (enter your rate as a decimal; so 1% would be .01)

Current equipment    Current sales value $14,000    Final sales value 2,680    Operating costs 66,830 New equipment    Purchase cost $164,000    Final sales value 2,680    Operating cost savings 27,690

Explanation / Answer

Investment 164,000 - 14,000 = 150,000
operating cost savings 27,690
IRR = 3%

The PV of an Annuity of 27,690 for 6 yrs, at 3%, is 150,000.

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