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:

Maintenance work will be necessary on the new equipment in Year 4, costing $3,500. The current equipment will last for 6 more years; the life of the new equipment is also 6 years. Assuming a discount rate of 4%, what is the net present value of replacing the current equipment?

Current equipment    Current sales value $5,000    Final sales value 2,000    Operating costs 67,500 New equipment    Purchase cost $45,000    Final sales value 5,500    Operating cost savings 9,000

Explanation / Answer

Net present value of replacing the current equipment is:

Replacing Equipment Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total Cost of new equipment ($45,000) ($45,000) Sale of old equipment $5,000 $5,000 Salvage Value 5,500 $5,500 Operating Costs -58,500 -58,500 -58,500 -58,500 -58,500 -58,500 ($351,000) Maintenance Costs -3,500 ($3,500) Net Cash Flow ($40,000) ($58,500) ($58,500) ($58,500) ($62,000) ($58,500) ($53,000) ($336,000) Discount rate 4% , Life 6 years Present Value factor 1 0.962 0.925 0.889 0.855 0.822 0.790 Present Value of Net Cash flow -40,000 -56,250 -54,087 -52,006 -52,998 -48,083 -41,887 ($345,310) Net Present value -40,000 -56,250 -54,087 -52,006 -52,998 -48,083 -41,887 ($345,310)

Related Questions

Navigate

• Browse (All)
• Browse X
• Subjects

---

---

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