X Company is considering replacing one of its machines in order to save op machi
ID: 2509754 • Letter: X
Question
X Company is considering replacing one of its machines in order to save op machi will cost $154,000 and will last for four years, at which time it can be sold for $1,000. The current machine will also last for four more years but will not be worth anything at that time. It cost $45,000 four years ago, but its current disposal value is erating costs. Operating costs with the current ne are $60,000 per year; operating costs with the new machine are expected to be $30,450 per year. The new machine only $4,000. 9 Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine? 9. AO $ 49,11 BO S-61,439 CO s 76,799 DO $-95,998 EO $-119,998 FO $-149,997 8 pt 10. Assume the following two changes: 1) both machines will last for six more years, 2) the salvage value of the new ine 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 0.08Explanation / Answer
Solution:
Part -9
Calculation of Net Cash Outflow required for New Machine
$$
Cost of New Machine
$154,000
Less: Expected Sales Proceeds from Old Machine
($4,000)
Total Cash outflow required
$150,000
Annual Saving in Operating Cost = Operating Cost with current machine $60,000 – Expected Operating cost with new machine $30,450 = $29,550
Calculation of Incremental Net Present Value
Years
0
1
2
3
4
Net Cash Outflow required for new machine
($150,000)
Annual Saving in Operating Cost (Cash Inflow)
$29,550
$29,550
$29,550
$29,550
Salvage Value of New Machine
$1,000
Net Cash Flow
($150,000)
$29,550
$29,550
$29,550
$30,550
Discount Factor @ 7%
1
0.935
0.874
0.817
0.764
Present Value
($150,000)
$27,629
$25,827
$24,142
$23,340
Net Present Value
($49,062)
Note – I have taken discounting factor at 3 decimal places…
The correct answer is A. -$49,151 (Answer may be slightly change due to decimal places)
Part 10 ---
IRR is the discounting rate at which Present Value of Net Cash Outflow will be equals to Present Value of Net Cash Inflow. In other words the Net Present Value is zero at IRR. It can be calculated by using trial and error method.
At 0.05 the PV of Cash Outflow is equals to PV of Cash Inflow
Years
0
1
2
3
4
$5
6
Net Cash Outflow required for new machine
($150,000)
Annual Saving in Operating Cost (Cash Inflow)
$29,550
$29,550
$29,550
$29,550
$29,550
$29,550
Net Cash Flow
($150,000)
$29,550
$29,550
$29,550
$29,550
$29,550
$29,550
Discount Factor @ 5%
1
0.952
0.907
0.864
0.823
0.784
0.747
Present Value
($150,000)
$28,132
$26,802
$25,531
$24,320
$23,167
$22,074
Net Present Value
$25
Hence, the IRR is 0.05 or 5%
The correct option is C. 0.05
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
$$
Cost of New Machine
$154,000
Less: Expected Sales Proceeds from Old Machine
($4,000)
Total Cash outflow required
$150,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.