Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $61,000 per year; operating costs with the new machine are expected to be $43,000 per year. The new machine will cost $72,000 and will last for six years, at which time it can be sold for $2,500. The current machine will also last for six more years but will not be worth anything at that time. It cost $32,000 three years ago but is currently worth only $7,000. Assuming a discount rate of 8%, what is the incremental net present value of replacing the current machine with the new machine?

Answer 1

Incremental net present value = Present value of operating cost saving at 8%, 6 years + Present value of salvage value of old machine at 8%, 6th years - Net cash outflow

= (61000-43000)*4.6229 + 2500*0.6302 - (72000-7000)

= $19787.70