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 Current equipment Current sales value Final sales value Operating costs $5,000 4,000 61,000 New equipment Purchase cost Final sales value Operating costs $48,000 7,000 51,000 Maintenance work will be necessary on the new equipment in Year 3, costing $4,000. The current equipment will last for 5 more years; the life of the new equipment is also 5 years. Assuming a discount rate of 6%, what is the net present value of replacing the current equipment? Tries 0/5 Submit Answer

Explanation / Answer

An incremental analysis is made of new equipment over the existing to find out NPV.

Calculation of present value cash outflows of old equipment:

Present value of outflows of new equipment:

Net benefit of replacing= 253,965.16-191,962.65= 62002.51

Y1 Y2 Y3 Y4 y5 Operating costs 61000 61000 61000 61000 61000 Less: Salvage value -4000 Net outflow 61000 61000 61000 61000 57000 Discount factor@6% 0.9434 0.8900 0.8396 0.7921 0.7473 Present value 57,547.17 54,289.78 51,216.78 48,317.71 42,593.72 present value of total outfolws 253,965.16

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