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:

Maintenance work will be necessary on the current equipment in Year 3, costing $3,000. The current equipment will last for 6 more years; the life of the new equipment is also 6 years.

1. Assuming a discount rate of 6%, what is the net present value of replacing the current equipment?

**I asked this once already and someone gave me the incorrect answer of 3608** This is all the info given in the question**

(Not sure which chart is helpful)

Present Value of $1.00

Present Value of an Annuity of $1.00

Current equipment    Current sales value $5,000    Final sales value 3,500    Operating costs 70,000 New equipment    Purchase cost $53,000    Final sales value 6,000    Operating cost savings 8,500

Explanation / Answer

Answer

Net present value of replacing the current equipment

PV of Cash Flow

($)

Initial Investment

= Cost of New Machinery- Current resale value of current machine i.e. 53000-5000= $ 48000

Since NPV comes out +544.50 $ the machine can be replaced

Particulars Year PVF @ 6 % Cash Flow ($)

PV of Cash Flow

($)

Initial Investment

= Cost of New Machinery- Current resale value of current machine i.e. 53000-5000= $ 48000

0 1 (48000) (48000) Operating annual Saving 1 to 6 4.917 8500 41794.50 Saving in Maintainance Cost of current machine at year 3 end 3 0.840 3000 2520 Resale Value at year 6 end 6 0.705 6000 4230 Net Present Value 544.50

Related Questions

Navigate

• Browse (All)
• Browse X
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.