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 $62,000 per year; operating costs with the new machine are expected to be $43,000 per year. The new machine will cost $67,000 and will last for 6 years, at which time it can be sold for $1,000. The current machine will also last for 6 more years but will not be worth anything at that time. It's currently worth $5,000. Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine with the new machine?

Explanation / Answer

INCREAMENTAL NET PRESENT VALUE = $35613

0 1 2 3 4 5 6 TOTAL SAVING IN OPERATING COST 0 19000 19000 19000 19000 19000 19000 COST OF NEW MACHINE -67000 SALE VALUE OF OLD MACHINE 5000 SCRAP VALUE 1000 DICOUNTING FACTOR 1 0.935 0.873 0.816 0.763 0.713 PRESENT VALUE -62000 19000 17765 16587 15504 14497 14260 35613

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