Question

1. Station WJXT is considering the replacement of its old fully depreciated sound mixer. Two new models are available. Mixer X has a cost of $350,000, a ten-year life, and after-tax cash flows (including the tax shield from depreciation) of $83,500 per year. Mixer Y has a cost of $210,000, a five-year expected life, and after-tax cash flows (including the tax shield from depreciation) of $68,800 per year. No new technological developments are expected. The discount rate is 12 percent. Should WJXT replace the old mixer, and, if so, with X or Y?

Answer 1

Given : Particulars Cost Cashflow Life Mixer X 350000 83500 10 Mixer Y 210000 68800 5 discount rate 12% Solution: Particulars Cashflow PVAF A) Present Value (Annual Benefit) Mixer Mixer Y 8350068800 5.650 3.605 471794 248009 B) Cost 350000 | 210000 Net present Value (A-B] PVAF Equated Annual Worth (EAW) 121794 5.650 21556 38009 3.605 10544 where, PVAF (1+r)^n - 1 rX (1+r)^n [1/(1+r)]^n PVF where r is discount rate and n is number of year Present Value (Annual Benefit) Annual Worth Cashflow X PVAF Net Present Value PVAF As Net present value of both the mixer is positive, WJXT must replace old mixer. WJXT must select Mixer X as it has higher EAW as compared to Mixer Y.