Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $60,000 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 $35,000 three years ago but is currently worth only $6,000. Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine with the new machine? Tries 0/3 Submit Answer

Answer 1

Net incremental inflow per annum is $60000-$43000=$17000

Also Net capital outlay is $72000 for new equipment

And $6000 will be recieve if old equipment is sold therfore salcage valie of old equipment is $35000-$6000=29000

And net capital outfolw today will be $ 72000-$29000=$43000

Also the incremental benfit recieved upto 6 years is $17000*5.389=$81030 (discounting at 7% for 6 years)and salvage value recieved from new equipment after 6 years is $1666 after discounting at 7%

Therefore net incremental npv of replacement is

+$1666+$81030-$43000=$39697.