Defender cost for current year=$4,750 Challenger lowest euac at year 2=4,592 Rep

Question

Defender cost for current year=$4,750 Challenger lowest euac at year 2=4,592 Replace defender with challenger. 13-33 Should NewTech's computer system be replaced this year? The system has a salvage value now of $5000, which will fall to $4000 by the end of the year. The cost of lower productivity linked to the older computer is $3000 this year. NewTech uses an interest rate of 15%. What is the cost advantage of the best system? A potential new system costs $12,000 and has the following salvage values and lost productivity for each year. Year Lost Productivity 0 $12,000 9,000 7,000 5,000 3,000 1000 2000 3000 2 4

Explanation / Answer

Answer:

To solve this question we need to compute present value of cash inflow and cash outflow by multiplying with PV factor. Plesae refer the solution given hereunder for better understanding.

NPV of Cash flow if computer replaced today:

To solve this question we need to compute present value of cash inflow and cash outflow by multiplying with PV factor. Plesae refer the solution given hereunder for better understanding.

NPV of Cash flow if computer replaced today:

Year Cash Inflow (Salvage Value) Cash out flow (Replacement Cost) Lost Productivity PV factor @ 15% (1/1+r) NPV of Cash flow (a) (b) (c) (d) (e)= ((a)-(b)-©)x (d) 0 5000 12000 0                          1.00                      (7,000.00) 1 9000 0                          0.87                        7,826.09 2 7000 1000                          0.76                        4,536.86 3 5000 2000                          0.66                        1,972.55 4 3000 3000                          0.57                                     -   Net present value (NPV) if System replaced in year one                        7,335.50 NPV of Cash flow if computer replaced after one year Year Cash Inflow (Salvage Value) Cash out flow Lost Productivity PV factor @ 15% NPV of Cash flow (a) (b) (c) (d) (e)= ((a)-(b)-©)x (d) 0 5000 3000                          1.00                        2,000.00 1 4000 12000 0                          0.87                      (6,956.52) 2 9000 0                          0.76                        6,805.29 3 7000 1000                          0.66                        3,945.10 4 5000 2000                          0.57                        1,715.26 5 3000 3000                          0.50                                     -   Net present value (NPV) if System replaced in year two                        7,509.13                            173.63 Since NPV in case of replacement of system in year two is higher $174 ($7509-$7335) i.e. cost advantage therefore it is recommended to replace the system in year 2.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.