X Company must decide whether to continue using its current equipment or replace
ID: 2463154 • Letter: X
Question
X Company must decide whether to continue using its current equipment or replace it with new, more efficient equipment. The following information is available for the current and new equipment:
The current and new equipment will last for 6 years. If X Company replaces the current equipment, what is the approximate internal rate of return (enter your rate as a decimal; so 1% would be .01)
Current equipment Current sales value $10,000 Final sales value 3,890 Operating costs 61,850 New equipment Purchase cost $160,000 Final sales value 3,890 Operating cost savings 28,615Explanation / Answer
On replacement the approximate IRR will be 4.62 %.
*we have considered the operating saving as annual saving for 6 years.
Years Purchase cost salvage value operating cost saving Salvage value of old Total cashflows 0 -160000 10000 -150000 1 28615 28615 2 28615 28615 3 28615 28615 4 28615 28615 5 28615 28615 6 3890 28615 32505 4.62% IRR(L4:L10)Related Questions
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