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 $65,000 per year; operating costs with the new machine are expected to be $36,385 per year. The new machine will cost $155,000 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 $40,000 four years ago, but its current disposal value is only $5,000. 9. Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine? Submit Answer Tries 0/:3 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 [enter your answer as. XX, so 1% would be .01)? Submit Answer Tries o/3

Explanation / Answer

Req 9: NPV: Savings in cost (65000-36385) 28615 Annuity factor for 4 years at 7% 3.3872 Ppresent value of savings 96924.73 Add: Present value of Salvage 762.9 (1000* PVF i.e. 0.7629) Total Present value 97687.63 Less: Initial investment 150,000 (155000-5000) Net present value -52,312 Req 10 IRR Savings in cost (65000-36385) 28615 Annuity factor for 6 years at 4% 5.242 Ppresent value of savings 149999.8 Less: Initial investment 150,000 (155000-5000) Net present value 0 IRR = 4%

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