Question

X Company is trying to decide whether to continue using old equipment to make Product A or replace it with new equipment that will have lower operating costs. The following information is available:

• The new equipment will cost $45,000. Disposal value at the end of its 5-year useful life will be $5,000.
• The old equipment was purchased 3 years ago for $24,000. It can be sold immediately for $10,000 but will have zero disposal value in 5 years.
• Maintenance work, costing $3,000, will be necessary on the old equipment in Year 3.
• The new equipment will result in $9,000 of operating cost savings each year.

Assuming a discount rate of 6%, what is the net present value of replacing the old equipment with the new equipment? [Note: Use the Present Value tables in the Coursepack.]

Answer 1

The answer has been presenetd in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Net Present value = Present value of cash inflows - Present value of cash outflows = ((annual saving * present value annuity (6%,5))+(saving in maintenance cost/(1+6%)^3)+(disposal value / (1+6%)^5)) - (cost of new equipment - sale value of old machine) = ((90000* ((1-(1.06)^-5)/.06))+ (3000/(1.06)^3) + (5000/(1.06)^5)) - (45000-10000) = ( 37911.27+2518.858+3736.291)-35000 = 44166.42-35000 = $ 9166.42 Thus the net present value of replacing old machine with new machine = $ 9166.42 For any help please comment in the comment box Thank You