X Company must decide whether to continue using its current equipment or replace
ID: 2574954 • 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 $5,000 4,000 61,000 New equipment Purchase cost Final sales value Operating costs $48,000 7,000 51,000 Maintenance work will be necessary on the new equipment in Year 3, costing $4,000. The current equipment will last for 5 more years; the life of the new equipment is also 5 years. Assuming a discount rate of 6%, what is the net present value of replacing the current equipment? (previous wrong answers from Chegg tutors were: $62,002.51, $989, and $-2,999) Present Value of $1.00 Period 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% 11% 12%! 1 0.971 0.962 0.952 0.943 0.35 0.926 0.917 .0.S01 0893 2 0.943 0.925 0.9 0.890 0.873 0.857 0.842 0.826 0.812 0.797 3 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.731 0.731 0.712 4 0.8es 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 5 | 0.863 | 0.822 | 0.784 | 0.747 | 0.713.: 0.681 10.650 | 0.621 | 0.593 | 0.567 ° o.837 | 0.790 | 0.746 0.705 0.666 0.630 0.5% 0.564 0.535 as07 0.813 0.760 0.711 0.665 0.623 0.583 0.547 013 0.482 0.452 8-0.789 .731 0.577 0.527 0.582 0.540 0.502 .467 434 .404 Present Value of an Annuity of $1.00 7% 8% 9% 10% 11% 12% 0% period 3% 4% 5% 1 0.971 0.962 0.952 0.943 0.935 0.926 0.9170.9 91 0.893 2 1.913 1.886 1.839 1833 1808 1.783 1.79 1.736 1.713 1.690 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2444 2.402 4 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 5 4580 4.452 4.329 4.212 4.100 .993 3.890 3.791 3.696 3.605 6 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4355 4231 4.111 7 6.230 6.002 .786 $.582 5.389 5.206 5.033 468 4712 4564 7.020 6.733 6463 210 5.971 5747 5.533 5335 3.146 4968Explanation / Answer
Calculation of NPV of Current Equipment Particulars Year 6% Factor Amount Present value D C C X D Cash Inflow Salvage Value of Old Equip. 0 1.000 5,000 5,000 Salvage Value of New Equip. 5 0.747 7,000 5,229 A. Total Cash Inflow - PV 10,229 Cash Outflow Cost of New Equipment 0 1.000 48,000 48,000 Maint Cost of Equipment 3 0.840 4,000 3,360 Operating Cost 1-5 4.212 51,000 214,812 B. Total Cash Outflow - PV 266,172 NPV (A - B) (255,943) Calculation of NPV of Old Equipment Particulars Year 6% Factor Amount Present value D C C X D Cash Inflow Salvage Value of Old Equip. 0 1.000 4,000 4,000 A. Total Cash Inflow - PV 4,000 Cash Outflow Operating Cost 1-5 4.212 61,000 256,932 B. Total Cash Outflow - PV 256,932 NPV (A - B) (252,932) NPV of Replacing the Old Equipment = (-)$255,943 - (-)$252,932 NPV of Replacing the Old Equipment = (-)$3011
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