X Company must decide whether to continue using its current equipment or replace

Question

X Company must decide whether to continue using its current equipment or replace it with new, more efficient equipment. The following information is available for the current and new equipment:

Maintenance work will be necessary on the current equipment in Year 3, costing $2,500. The current equipment will last for 6 more years; the life of the new equipment is also 6 years. Assuming a discount rate of 8%, what is the net present value of replacing the current equipment?

Current equipment    Current sales value $5,000    Final sales value 4,000    Operating costs 65,000 New equipment    Purchase cost $48,000    Final sales value 6,500    Operating cost savings 8,500 Present Value of $1.00 10% | 1196 | 1290 Pe riod 3% 4% 5% 6% 7% 8% 9% | 0.971 0.962 0.952 0.943 0.935 0.926 0.9170.909 0.901 0.893 0.943 0.925 0.9070.890 0.873 0.857 0.842 0.826 0.812 0.797 0.915 0.8890.8640.840 0.816 0.794 0.772 0.751 0.731 0.712 0.888 0.855 0.823 0.792 0.763 0.7350.708 0.683 0.659 0.636 3 4 5 6 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.813 0.7600.711 0.665 0.623 0.583 0.5470.513 0.482 0.452 8 0.789 0.731 0.677 0.627 0.582 0.5400.502 0.467 0.434 0.404 Present Value of an Annuity of $1.00 10% | 1196 | 1290 riod 3% | 390 4% 5% 6% 9% 7% 8% 0.971 0.962 0.952 0.943 0.935 0.926 0.9170.909 0.901 0.893 1.913 1.8861.8591.833 1.808 1.783 1.7591.7361.713 1.690 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 5.417 5.242 |5.0764.9174.7674.623 4.486 4.355 4.231 4.111 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 3 4 5 6 8

Explanation / Answer

Net Present value of continuing old equipment is less than replacing equipment. So they should not replace equipment

Replacing Equipment Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total Cost of new equipment ($48,000) ($48,000) Sale of old equipment $4,000 $4,000 Salvage Value 6,500 $6,500 Operating Costs -56,500 -56,500 -56,500 -56,500 -56,500 -56,500 ($339,000) Maintenance Costs $0 Net Cash Flow ($44,000) ($56,500) ($56,500) ($56,500) ($56,500) ($56,500) ($50,000) ($326,500) Discount rate 8% , Life 6 years Present Value factor 1 0.926 0.857 0.794 0.735 0.681 0.630 Present Value of Net Cash flow -44,000 -52,315 -48,440 -44,852 -41,529 -38,453 -31,508 ($301,097) Net Present value -44,000 -52,315 -48,440 -44,852 -41,529 -38,453 -31,508 ($301,097) Continue Old equipment Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total Sale of old equipment 4,000 $4,000 Operating Costs -65,000 -65,000 -65,000 -65,000 -65,000 -65,000 ($390,000) Maintenance Costs -2,500 ($2,500) Net Cash Flow $0 ($65,000) ($65,000) ($67,500) ($65,000) ($65,000) ($61,000) ($327,500) Discount rate 8% , Life 6 years Present Value factor 1 0.926 0.857 0.794 0.735 0.681 0.630 Present Value of Net Cash flow 0 -60,185 -55,727 -53,584 -47,777 -44,238 -38,440 ($299,951) Net Present value 0 -60,185 -55,727 -53,584 -47,777 -44,238 -38,440 ($299,951)

Related Questions

Navigate

• Browse (All)
• Browse X
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.