X Company is considering replacing one of its machines in order to save operatin

Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $70,000 per year; operating costs with the new machine are expected to be $45,000 per year. The new machine will cost $73,000 and will last for 7 years, at which time it can be sold for $1,000. The current machine will also last for 7 more years but will not be worth anything at that time. It cost $41,000 four years ago, but its current disposal value is only $4,000. Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine with the new machine?

Explanation / Answer

Details Amount Initial acquistion Cost    -73,000.00 Less Scrap Value of Old Machine        4,000.00 Net Cash outlay (A)    -69,000.00 Incremental Savings in Operating cost=(70000-45000)      25,000.00 PVAF @ 7% for 7 years                 5.39 Present value of operating cash inflows 1,34,732.24 Residual Value        1,000.00 DF                 0.62 Present Value of Residual value            622.75 Net Cash inflows   (B) 1,35,354.98 NPV      66,354.98

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