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

ID: 2574842 • Letter: X

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 $10,000 3,500 65,000 New equipment Purchase cost Final sales value Operating cost savings $51,000 6,000 9,000 Maintenance work will be necessary on the current equipment in Year 4, costing $4,000. The current equipment wil last for 6 more years; the life of the new equipment is also 6 years. Assuming a discount rate of 696, what is the net present value of replacing the current equipment? 6785 Submit Answer Tries 3/s Previous Tries

Explanation / Answer

Year

Particulars

Cash flow

PVF

PV

0

Purchase cost

($51,000.00)

1

($51,000.00)

1-6

Savings in operating cost

$9,000.00

4.9174

$44,256.60

6

Scrap value of New equipment

$6,000.00

0.705

$4,230.00

0

Scrap value of Current equipment

$10,000.00

1

$10,000.00

Net present Value

$7,486.60

Year

Particulars

Cash flow

PVF

PV

0

Purchase cost

($51,000.00)

1

($51,000.00)

1-6

Savings in operating cost

$9,000.00

4.9174

$44,256.60

6

Scrap value of New equipment

$6,000.00

0.705

$4,230.00

0

Scrap value of Current equipment

$10,000.00

1

$10,000.00

Net present Value

$7,486.60