Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $64,000 per year; operating costs with the new machine are expected to be $49,000 per year. The new machine will cost $71,000 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 $34,000 three years ago but is currently worth only $4,000. Assuming a discount rate of 4%, what is the incremental net present value of replacing the current machine with the new machine? * Tries 0/3 X Company is planning to launch a new product. A market research study, costing $150,000, was conducted last year, indicating that the product will be successful for the next four years. Profits from sales of the product are expected to be $170,000 in each of the first two years and $110,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $88,000. New manufacturing equipment will have to be purchased for $360,000; it will have zero disposal value at the end of the four years. Assuming a discount rate of 5%, what is the net present value of launching the new product? # * Tries 0/3

Answer 1

Answer 1

Cost of new Machine = $71000

Sale value of old machine = $4000

Saving in operating expenses by replacing old machine with new = 64000-49000= $15000

Sale value of new machine after 5 years = $1500

Incremental PV :

Year	Amount	PV factor@4%	PV
0	(71000-4000)	1	(67000)
1	15000	0.0961538	14423.0769
2	15000	0.9245562	13868.3430
3	15000	0.8889963	13334.9445
4	15000	0.8548042	14104.2693
5	15000+1500	0.8219271	13561.79715
			2292.43085

Answer 2

Cost of Advertising = $ 88000

Cost of Equipment = $ 360000

Profit for first 2 years = $170000

Profit for last 2 years = $110000

Year	Amount	PV factor @ 5%	PV
0	(88000+360000)	1	(448000)
1	170000	0.95238095	161904.7615
2	170000	0.90702948	154195.0113
3	110000	0.86383759	95022.13490
4	110000	0.822702475	90497.27222
			53619.179877

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