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 10,000 2,000 61,500 New equipment Purchase cost Final sales value Operating cost savings $48,000 5,500 8,500 Maintenance work will be necessary on the new equipment in Year 4, 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 6%, what is the net present value of replacing the current equipment? Submit Answer Tries 0/5

Explanation / Answer

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Current Sales Value 10000 Purchase cost -48000 Final Sales Value old machine 2000 Final Sales Value New machine 5500 Saving in operating Cost 8500 8500 8500 8500 8500 8500 Manintenance Work -2500 Net Cash Flow -38000 8500 8500 8500 6000 8500 16000 PV Factor 6% 1 0.943396 0.889996 0.839619 0.792094 0.747258 0.704961 PV of Cash flow -38000 8018.868 7564.97 7136.764 4752.562 6351.694 11279.37 NPV of Repalcement 7104.23

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