Question

X Company is trying to decide whether to continue using old equipment to make Product A...

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 $52,000. Disposal value at the end of its 6-year useful life will be $5,500.
  • The old equipment was purchased 3 years ago for $23,000. It can be sold immediately for $10,000 but will have zero disposal value in 6 years.
  • Maintenance work, costing $2,500, will be necessary on the old equipment in Year 4.
  • The new equipment will result in $9,500 of operating cost savings each year.

Assuming a discount rate of 7%, what is the net present value of replacing the old equipment with the new equipment? [Note: Use the Present Value tables in the Coursepack.]

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Answer #1

Net present value = Present value of operating cost savings + Present value of Maintenance work + Present value of disposal value of new machine - Net purchase cost

= 9500*4.7665+2500*0.7629+5500*0.6663 - (52000-10000)

= $8854

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