X Company must decide whether to continue using its current cquipment or repluce

Question

X Company must decide whether to continue using its current cquipment or repluce it with new, more efickent equipment. The following information is available for the current and new equipment Current equipment Current sales value Final sales value Operating costs $10,000 3,000 69,000 New equipment Purchase cost Final sales value Operating cost savings $52,000 6,500 9,500 Maintenance work will be necessary on the new equipment in Year 4, costing $3,500. The current equipment will last for 5 more years, the life of the new equipment is also 5 years. Assuming a discount rate of 8%, what is the net present value of replacing the current equipment? D$6,170 EO s-8947 FO 6-12.973 BO 8-2.935 C8-4,256

Explanation / Answer

Answer is -4256

0 1 2 3 4 5 Saving in Operating Cost 9500 9500 9500 9500 9500 Cost of Machine -52000 Sale value of old machine 10000 Opportunity cost -3000 Maintenance Expense -3500 sales value of new Machine 6500 Net Cas flow -42000 9500 9500 9500 6000 13000 PF factor 8% 1 0.926 0.857 0.794 0.735 0.681 Present value -42000 8797 8141.5 7543 4410 8853 NPV -4256

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