Question

X Company is considering replacing one of its machine: in order to save operating costs. Operating costs with the current machine are $68,000 per year; operating costs with the new machine are expected to be $42,000 per year. The new machine will cost $66,000 and will last for six years, at which time it can be sold for $1,500. The current machine will also last for six more years but will not be worth anything at that time It cost $33,000 three years ago but is currently worth only $8,000. Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine with the new machine?

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.

A B C E F G H I J K L M D answer In the given question we have to calculate the net present value of replacing the current machine with new machine Net Present Value = Present Value of saving in operating cost + Present value of sale price of new machine - (net outflow for purchase of new machine) Net Present value = (26000* present value annuity (7%,6))+(1500*present value (7%,6))-(purchase cost of new machine - present worth of old machine) Net Present value = (26000*4.767)+(1500*.666)-(66000-8000) = $ 66941 Thus the correct answer is $ 66941 2 Note 3 Saving in operating cost = operating cost with old machine-operating cost with old machine 4 = 68000-42000 5 = $ 26000 7 For any help please comment in the comment box mm