Question

8 pt X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $70,000 per year; operating costs with the new machine are expected to be $46,000 per year. The new machine will cost $70,000 and will last for six years, at which time it can be sold for $1,500. The current machine will also last for six more years but will not be worth anything at that time. It cost $31,000 three years ago but is currently worth only $5,000. Assuming a discount rate of 4 % , what is the incremental net present value of replacing the current machine with the new machine? 9. BO $77,491 FO $189,188 CO $96,864 EO $151,350 DO $121,080 8 pt X Company is plannin

Answer 1

Solution 9:

Computation of NPV - Replacement proposal of Equipment - X Company
Particulars	Period	Amount	PV Factor	Present Value
Cash Outflows:
Cost of new Equipment	0	$70,000	1	$70,000
Sale value of old equipment	0	-$5,000	1	-$5,000
Present value of cash outflows (A)				$65,000
Cash Inflows:
Annual cost savings	1-6	$24,000	5.242	$125,808
Difference in Salvage value of old and new machine	6	$1,500	0.790	$1,185
Present value of cash Inflows (B)				$126,993
NPV (B-A)				$61,993

Hence option A is correct.