4444444 8 pt X Company is considering replacing one of its machines in order to

Question

4444444 8 pt X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $62,000 per year; operating costs with the new machine are expected to be $42,000 per year. The new machine will cost $75,000 and will last for 6 years, at which time it can be sold for $1,000. The current machine will also last for 6 more years but will have zero salvage value. Its current disposal value is $5,000. Assuming a discount rate of 4%, what is the difference between the net present value if X Company replaces the current machine and the net present value if it keeps the current machine? 4. AO $24,572 BO $35,630 CO $51,664 DO $74,912 EO $108,623 FO $157,503

Explanation / Answer

a. Incremental Net Cash Outflow = 75,000 - 5,000 = $70,000

b. Incremental Cash Inflow = 62,000 - 42,000 = $20,000
Present value of Incremental Cash Inflow = 20,000 x PVAF(4%, 6years) = 20,000 x 5.242 = $104,842.74

c. Incremental Terminal Cash Inflow = 1,000 - 0 = $1,000
Present value of Terminal Cash Inflow = 1,000 x PVF(4%, 6years) = 1,000 x 0.790 = $790.31

d. Incremental NPV = -70,000 + 104,842.74 + 790.31 = $35,633.05 or $35,630 Thus, Option B.

Note: For the value of PVF and PVAF refer PVF table and PVAF table.

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