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X Company must decide whether to continue using its current equipment or replace

ID: 2463371 • 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). Use tables below for Present Value.

Present Value of $1.00

Present Value of an Annuity of $1.00

Current equipment    Current sales value $18,000    Final sales value 2,980    Operating costs 65,070 New equipment    Purchase cost $168,000    Final sales value 2,980    Operating cost savings 31,470

Explanation / Answer

Solution-

Investment=Purchase cost of new machine-Current Sales value of machine

=$168,000-$18,000

=150,000

Cash flow saving=$31,470

Investment/Cash Flow=150,000/31,470

=4.766

7% or .07

As per table 2