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 $62,000 per year; operating costs with the new machine are expected to be $41,000 per year. The new machine wil cost $68,000 and will last for 5 years, at which time it can be sold for S2,500. The current machine will also last for 5 more years but will have zero salvage value. Its current disposal value is $8,000. Assumìng a discount rate of 6%, what is the difference between the net present value if X Company replaces the current machine and the net present value if it keeps the current machine? EO S71,331 FO $94,870 CO $40,325 DO $53,632 4. AO $22,797 BO $30,320

Answer 1

If current machine is kept

Year	Cash Flow	PV Factor	PV
		1/ (1 + 6%)^Year	Cash Flow X PV Factor
1	$ 62,000.00	0.94340	$                      58,490.80
2	$ 62,000.00	0.89000	$                      55,180.00
3	$ 62,000.00	0.83962	$                      52,056.44
4	$ 62,000.00	0.79209	$                      49,109.58
5	$ 62,000.00	0.74726	$                      46,330.12
			$                    261,166.94

If current machine is replaced

Year	Cash Flow	PV Factor	PV
0	$ 68,000.00	1.00000	$    68,000.00
0	$ (8,000.00)	1.00000	$    (8,000.00)
1	$ 41,000.00	0.94340	$    38,679.40
2	$ 41,000.00	0.89000	$    36,490.00
3	$ 41,000.00	0.83962	$    34,424.42
4	$ 41,000.00	0.79209	$    32,475.69
5	$ 41,000.00	0.74726	$    30,637.66
5	$ (2,500.00)	0.74726	$    (1,868.15)
			$ 230,839.02

Difference is Option B $ 30,320