X Company must decide whether to continue using its current equipment or replace
ID: 2575334 • 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:
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?
I tried:
Net Present value of continuing old equipment is less than replacing equipment. So they should not replace equipment
($299,951)
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 8Explanation / Answer
purchase cost
48000
less sales value
5000
initial investment
43000
Year
annual operating saving
maintenance
net annual savings
1
8500
8500
7870.37
2
8500
8500
7287.38
3
8500
2500
6000
4762.993
4
8500
8500
7265.836
5
8500
8500
5784.957
6
8500+6500
15000
9452.544
sum of present value of net annual savings
42424.08
less sum of present value of cash outflow
43000
Net present value
-575.919
purchase cost
48000
less sales value
5000
initial investment
43000
Year
annual operating saving
maintenance
net annual savings
1
8500
8500
7870.37
2
8500
8500
7287.38
3
8500
2500
6000
4762.993
4
8500
8500
7265.836
5
8500
8500
5784.957
6
8500+6500
15000
9452.544
sum of present value of net annual savings
42424.08
less sum of present value of cash outflow
43000
Net present value
-575.919
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