uestions 9 and 10 refer to the following information: x Company is considering r

Question

uestions 9 and 10 refer to the following information: x Company is considering replacing one of its machines in order to save operating costs, Operating costs with the murnn will cost $155,000 and will last for four years, at which time it can be sold for $3,000. The current machine will also last for four more years but will not be worth anything at that time. It cost $40,000 four years ago, but its current disposal value is only $5,000. 9. Assuming a discount rate of 8%, what is the incremental net present value of AO s-38,870 replacing the current machine? FOSTI,616 9. BOS-43,923 CO $49,633 DO s-56,086 EOs-63.377 8 pt 10. Assume the following two changes: 1) both machines will last for six more years, 2) the salvage value of the new ter six years will be zero. If X Company replaces the current equipment, what is the approximate internal rate of return? 10. AO 0.03 BO 0.04 0.05 DO 0.06 EO 0.07 O 0.08 8 p Reconsider the lecture examnle rerardiner Middleto rn Commonite

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9 0 1 2 3 4 Total Saving 27690 27690 27690 27690 Cost of new machine -155000 Disposal Value 5000 3000 Net Cash Flow -150000 27690 27690 27690 30690 PV 1 0.925926 0.857339 0.793832 0.73503 Incremental PV -150000 25638.89 23739.71 21981.21 22558.07 -56086 10 0 1 2 3 4 5 6 Saving 27690 27690 27690 27690 27690 27690 Cost of new machine -155000 Disposal Value 5000 Net Cash Flow -150000 27690 27690 27690 27690 27690 27690 PV @ 3% 1 1 1 1 1 1 1 Incremental PV -150000 26883 26100 25340 24602 23886 23190 Since NPV is ~0 at 3%, IRR is 3%

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