Question

8 nf 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 $43,000 per year. The nntus machine will cost $72.000 and will last for five years, at which time it can be sold for $1,500. The current machine will also last for five more years but will not be worth anything at that time. It cost $31,000 three years ago but is currently worth only 87,000. Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine with the new machine? 9'6s Oa 026'EIS O4 199s Oa 6 091ES OH 6TZS OV wuet A market research study, costing $150,000, was conducted last dset are evnected

Answer 1

Solution:

Computation of NPV - Replacement proposal of Equipment - X Company
Particulars	Period	Amount	PV Factor	Present Value
Cash Outflows:
Cost of new Equipment	0	$72,000	1	$72,000
Sale value of old equipment	0	-$7,000	1	-$7,000
Present value of cash outflows (A)				$65,000
Cash Inflows:
Annual cost savings	1-5	$19,000	4.100	$77,900
Difference in Salvage value of old and new machine	5	$1,500	0.713	$1,070
Present value of cash Inflows (B)				$78,970
NPV (B-A)				$13,970

Hence option F is correct.