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: Current equipment Current sales value Final sales value Operating costs $5,000 4,000 65,500 New equipment Purchase cost Final sales value Operating costs $46,000 5,000 55,500 Maintenance work will be necessary on the new equipment in Year 4, costing $2,500. The current equipment will last for 5 more years; the life of the new equipment is also 5 years. Assuming a discount rate of 5%, what is the net present value of replacing the current equipment? 4152 Submit Answer Incorrect. Tries 1/5 Previous Tries

Explanation / Answer

1) Incremental initial cost = 46000-5000 = $    41,000.00 2) Savings in annual operating costs = 65500-55500 = $    10,000.00 PV of savings in annual operating costs = 10000*PVIFA(5,5) = 10000*4.3295 = $    43,295.00 3) PV of maintenance work in EOY 4 = 2500*1.05^4 = $      3,038.77 4) PV of incremental salvage value = (5000-4000)/1.05^5 = $          783.53 5) NPV of replacement =43295.00+783.63-3038.77-41000 = $            39.76 Answer

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