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

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:

Question:

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 Final sales value Operating costs $10,000 2,640 62,350 New equipment Purchase cost Final sales value Operating cost savings $160,000 2,640 32,450

Explanation / Answer

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

                      =$160,000-$10,000

                      =150,000

Cash flow saving=$32,450

Investment/Cash Flow=150,000/32,450

=4.622

8% or .08

As per table 2

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