X Company must decide whether to continue using its current equipment or replace
ID: 2463371 • Letter: X
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). Use tables below for Present Value.
Present Value of $1.00
Present Value of an Annuity of $1.00
Current equipment Current sales value $18,000 Final sales value 2,980 Operating costs 65,070 New equipment Purchase cost $168,000 Final sales value 2,980 Operating cost savings 31,470Explanation / Answer
Solution-
Investment=Purchase cost of new machine-Current Sales value of machine
=$168,000-$18,000
=150,000
Cash flow saving=$31,470
Investment/Cash Flow=150,000/31,470
=4.766
7% or .07
As per table 2
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