Thanks for help!!! x Company must decide whether to continue using its current e
ID: 2574046 • Letter: T
Question
Thanks for help!!!
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 $5,000 Final sales value 3,000 Operating costs 69,500 New equipment Purchase cost $51,000 Final sales value 6,000 Operating cost savings 9,500 Maintenance work will be necessary on the current 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 4%, what is the net present value of replacing the current equipment?Explanation / Answer
Year
Cash Flow(C)
PV Factor Formula
PV Factor(F) @ 4%
PV(=C x F)
0
$ (46,000)
1/(1+0.04)^0
1.00000
$ (46,000.00)
1
$ 9,500
1/(1+0.04)^1
0.96154
$ 9,134.62
2
$ 9,500
1/(1+0.04)^2
0.92456
$ 8,783.28
3
$ 9,500
1/(1+0.04)^3
0.88900
$ 8,445.47
4
$ 9,500
1/(1+0.04)^4
0.85480
$ 8,120.64
5
$ 15,500
1/(1+0.04)^5
0.82193
$ 12,739.87
NPV
$ 1,223.87
Capital investment = price of new machine – sales value of old machine = $ 51,000 - $ 5,000 = $ 46,000
Year 1st - 4th cash flow = operating cost savings = $ 9,500
Year 5th cash flow = operating cost savings + salvage value = $ 9,500 + $ 6,000 = $ 15,500
If we replace the machine now itself, year 3rd maintenance cost for old machine is irrelevant to us.
Year
Cash Flow(C)
PV Factor Formula
PV Factor(F) @ 4%
PV(=C x F)
0
$ (46,000)
1/(1+0.04)^0
1.00000
$ (46,000.00)
1
$ 9,500
1/(1+0.04)^1
0.96154
$ 9,134.62
2
$ 9,500
1/(1+0.04)^2
0.92456
$ 8,783.28
3
$ 9,500
1/(1+0.04)^3
0.88900
$ 8,445.47
4
$ 9,500
1/(1+0.04)^4
0.85480
$ 8,120.64
5
$ 15,500
1/(1+0.04)^5
0.82193
$ 12,739.87
NPV
$ 1,223.87
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