Question

8 pt X Company is considering replacing one of its machines in order to sove operating costs. Operating costs with the curtent machine are S69,000 per year; operating costs with the pew machipe are expected to be $49,000 per year. The new Tmachine will cost S68,000 and will last for five vears, at which time it can be sold for $2.000, The carrent machine will also last for five more years but will not be worth anything at that time. It cost $33,000 three years ago but is currently worth only 88,000. Asuming a discount rate of 6%, what is the increnental net present value of replacing the carreat machine with the new machine? 9. AO $13,176 BO $16.470 CO $20.587 DO $25,734 EO $32,168 FO $10.209 8 pt X Company is planning to launch a new product. A market research study, costing $120,000, was conducted last year, indicating that the product will be successful for the next four years. Profits from sales af the product are expected to be $178,000 in each of the first two years and $105,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $93,000. New manufacturing equipment will have to be purchased for $340,000; it will have zero disposal value at the end of the four years. Assuning a discount rate of 7%, what is the net present valne of launching the new product? 10. AO $22,372 BO $27.965 CO 831,956 DO $43,095 EO 851619 FO S68274 8 pt X Company mst replace one of its eurrent machines with either Macine A or Machine B. The usefiil life of both machines is seven years. Machine A costs $51,000, and Machine B casts $70,000, Estimated annual cash lows with the two machines are as follows: లల 51,0e Machine A S-6.000 Machine B S-7.000 Year -4,000 -3,000 3,000 -8,000 -8,000 -8,000 -6,000 3 4. 5 3.000 6 -5,000 -2,000 -2,000 7 -4,000 If X Company buys Machine B instead of Machine A, what is the payback period (in years)? 11. AO 2 DO5 EO 6 CO 4 FO 7

Answer 1

9	Calculation of cash flows if machine is not replaced
	Operating costs per year	$69,000
	Present value of operating costs over 5 years	69000*PVAF(5, 6%)
		$290,628
	Calculation of cash flows if machine is replaced
a	Initial Net Outlay	60000	(68000-8000)
	Operating costs per year	$49,000
b	Present value of operating costs over 5 years	49000*PVAF(5, 6%)
		$206,388
c	Present value of salvage after 5 years	2000*PVF(5, 6%)
		(2000*0.747)
		1494
	Present value of net outflow (a+b-c)	$264,894
	Incremental Net present value of replacing	(246840-238530)
		$25,734
	Answer D.   $25,734