X Company must decide whether to continue using its current equipment or replace
ID: 2463457 • 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 $16,000 Final sales value 3,220 Operating costs 62,440 New equipment Purchase cost $166,000 Final sales value 3,220 Operating cost savings 31,470Explanation / Answer
Current cash outflow = $166000 - Sale price of old equipment $16000 = $150000
Saving of the opeating cost per annum = $31470
Tenure of the project / equipment life = 6 years
Present value of future saving at 6% discount rate = 31470 * PVIFA(6%,6) = 31470 * 4.917 = $154738
Present value of future saving at 10% discount rate = 31470 * PVIFA(10%,6) = 31470 * 4.355 = $137052
the approximate internal rate of return = 6% + [ (154738 - 150000) / (154738 - 137052) ] * (10 -6)%
IRR = 7.07%
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