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 infomation is aable for the current and new equipment: Current equipment Current sales value Final sales value Operating costs $10,000 3,500 65,000 New equipment Purchase cost Final sales value Operating cost savings $51,000 6,000 9,000 Maintenance work will be necessary on the current equipment in Year 4, costing $4,000. The current equipment will last for 6 more years; the life of the new equipment is also 6 years. Assuming a discount rate of 696, what is the net present value of replacing the current equipment? Submit Answer Tries 0/s

Explanation / Answer

Answer:

1.Current Sale Vaue of current machine is $10000 and purchase value of new machine is $51000 so net investment will become $51000-$10000= $41000 at Year0.

2. Annual Cash Saving will be $9000 for Year1 to 6 .

3. Saving in Maintainance cost at Year4 will be $4000.

4.Cash Inflow in term of sale of machine at Year6 will be $6000.

So, NPV = PV of Cash Inflow - PV of Cash Out Flow-

NPV of replacement decision

= [ (9000*CPVF 6%, 1 to 6 years) + (4000*PVF6%, 4 year) + (6000* PVF6%, 4 year)] - [41000 * 1 ]

=[(9000*4.917)+(4000*.793)+(6000*.705)] - [41000 ]

=51655-41000

= $10655

Since Net Present Value is positive. It is better to replace the machine.

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