X Company is considering replacing one of its machines in order to save operatin
ID: 2452715 • Letter: X
Question
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $66,000 per year; operating costs with the new machine are expected to be $46,000 per year. The new machine will cost $65,000 and will last for 7 years, at which time it can be sold for $2,500. The current machine will also last for 7 more years but will not be worth anything at that time. It cost $42,000 four years ago, but its current disposal value is 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?
Explanation / Answer
The incremental net present value of replacing the current machine with the new machine is calculated as under:
Net Present Value of Old/Current Machine:
Net Present Value of New Machine:
Thus, the incremental net present value of replacing the current machine with the new machine is $ 347250.2 - $311045.59 = $ 36204.61
Year Operating Cost Discounting Rate Net Incremental Present Value 0 $ 8000 $ 8000 1 - 66000 1.07 -61682.2 2 -66000 1.15 -57391.3 3 -66000 1.23 -53658.5 4 -66000 1.31 -50381.6 5 -66000 1.40 -47142.8 6 -66000 1.50 -44000.0 7 -66000 1.61 -40993.8 Net present value $-347250.2Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.