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 $10,000    Final sales value 3,890    Operating costs 61,850 New equipment    Purchase cost $160,000    Final sales value 3,890    Operating cost savings 28,615

Explanation / Answer

Purchase cost of new equipment = $160000,

Cost of existing equipment = $ 10000

Operating cost savings form new equipment= $28615

the life of the new equipment is six years.

Irr = net cost of equipment / net savings

($160000 - $10000 = $150,000 )/ $28615= 5.242

Now ,(go to table of present value and at 6 years and find the value 5.242 which is at 4% = .04)

Or , pvaf @4%,6 years = 1/(1.04)6 =5.242

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