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

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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 $46,000. Disposal value at the end of its 5-year useful life will be $6,000.
The old equipment was purchased 3 years ago for $24,000. It can be sold immediately for $5,000 but will have zero disposal value in 5 years.
Maintenance work, costing $3,000, will be necessary on the old equipment in Year 4.
The new equipment will result in $9,000 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?

business accounting

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Answer 1

Answer #1

	Amount	PV factor	Present value
Equipment cost	-46000	1	-46000
Salvage value of old Equipment	5000	1	5000
Annual cost savings	9000	4.100	36900
Maintenance work old equipment	3000	0.763	2289
Disposal value	6000	0.713	4278
Net present value			2467

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Answer 2

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