X Company is considering replacing one of its machines in order to save opeatl m

Question

X Company is considering replacing one of its machines in order to save opeatl machine are $68,000 per year; operating costs with the new machine are expected to be will cost $154,000 and will las ear. The new machine t for four years, at which time it can be sold for $2,000. The current machine will also last for ut uilt $37,490 per y four more years but will not be worth anything at that time. It cost $40,000 four years ago, but its current disposal value is only $4,000. 9. Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine? 9. AO s-45,137 BO $-52,810 CO $-61,788 DO72,291 E84,581 FO $98,960 8 pt 10. Assume the following two changes: 1) both machines will last for six more years, 2) the salvage value of the new machine after six years will be zero. If X Company replaces the current equipment, what is the approximate internal rate of return? 10. AO 0.03 BO 0.04 CO 0.05 DO 0.06 EO 0.07 FO 0.08 itir fallere The college has decided not to rent vending

Explanation / Answer

Answer is A. - $45137 Explanation: Saving in operating cost (68000-37490) 30510 Annutiy factor for 4 years at 7% 3.3872 Present value of Savings in cost 103343.5 Add: Present value of Salvage of new at end of 4 yr 1525.8 ($ 2000 * present value factor i.e. 0.7629) Total Present value of Inflows 104869.3 Less: Initial Investment (154000-4000) 150,000 Net Present Value -45,131 Answer is D 0.06 Explanation: Saving in operating cost (68000-37490) 30510 Annutiy factor for 6 years at 6% 4.9173 Present value of Savings in cost 150026.8 Less: Initial Investment 150000 Nnet Present value 26.823

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