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

ID: 2453288 • 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 $64,000 per year; operating costs with the new machine are expected to be $48,000 per year. The new machine will cost $67,000 and will last for 5 years, at which time it can be sold for $2,000. The current machine will also last for 5 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

incremental net present value of replacing the current machine with the new machine is $8,029.13 Statemnet showing Cash flows Particulars Time PVf@7% Amount PV Cash Outflows                              -                        1.00       (59,000.00)              (59,000.00) PV of Cash outflows              (59,000.00) Cash inflows( Incremental Cost Savings)                       1.00                 0.9346         16,000.00                14,953.27 Cash inflows( Incremental Cost Savings)                       2.00                 0.8734         16,000.00                13,975.02 Cash inflows( Incremental Cost Savings)                       3.00                 0.8163         16,000.00                13,060.77 Cash inflows( Incremental Cost Savings)                       4.00                 0.7629         16,000.00                12,206.32 Cash inflows( Incremental Cost Savings)                       5.00                 0.7130         16,000.00                11,407.78 Cash inflows( Sale value of New Machine)                       5.00                 0.7130           2,000.00                  1,425.97 PV of Savings                67,029.13 NPV                  8,029.13 Operating costs of Old Machine             64,000.00 Operating costs of New Machine             48,000.00 Incremental Costs Savings             16,000.00 Purchase of new Machine             67,000.00 Disposal Of Old Machine               8,000.00 Net investment             59,000.00