Question

uestions 9 and 10 refer to the following information: x Company is considering replacing one of its machines in order to save operating costs, Operating costs with the murnn will cost $155,000 and will last for four years, at which time it can be sold for $3,000. The current machine will also last for four more years but will not be worth anything at that time. It cost $40,000 four years ago, but its current disposal value is only $5,000. 9. Assuming a discount rate of 8%, what is the incremental net present value of AO s-38,870 replacing the current machine? FOSTI,616 9. BOS-43,923 CO $49,633 DO s-56,086 EOs-63.377 8 pt 10. Assume the following two changes: 1) both machines will last for six more years, 2) the salvage value of the new ter six years will be zero. If X Company replaces the current equipment, what is the approximate internal rate of return? 10. AO 0.03 BO 0.04 0.05 DO 0.06 EO 0.07 O 0.08 8 p Reconsider the lecture examnle rerardiner Middleto rn Commonite

Answer 1

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9
	0	1	2	3	4	Total
Saving		27690	27690	27690	27690
Cost of new machine	-155000
Disposal Value	5000				3000
Net Cash Flow	-150000	27690	27690	27690	30690
PV	1	0.925926	0.857339	0.793832	0.73503
Incremental PV	-150000	25638.89	23739.71	21981.21	22558.07	-56086
10
	0	1	2	3	4	5	6
Saving		27690	27690	27690	27690	27690	27690
Cost of new machine	-155000
Disposal Value	5000
Net Cash Flow	-150000	27690	27690	27690	27690	27690	27690
PV @ 3%	1	1	1	1	1	1	1
Incremental PV	-150000	26883	26100	25340	24602	23886	23190
Since NPV is ~0 at 3%, IRR is 3%