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 3,000 64,500 New equipment Purchase cost Final sales value Operating costs $55,000 6,000 55,500 Maintenance work will be necessary on the current equipment in Year 3, costing $2,500. The current equipment will last for 5 more years; the life of the new equipment is also 5 years. Assuming a discount rate of 5%, what is the net present value of replacing the current equipment?

Explanation / Answer

If we sell the current equipment today, we get $5,000 and we need to spend $55,000 today. Over the next 5 years, annual savings = 64,500 - 55,500 = 9,000. At the end of 5 years, we can sell the new equipment for 6,000.

Using NPV function on a calculator or excel or using an equation with 5% discount rate, we get

NPV = NPV(5%, 9000...15000) - 50000 = -8,493.15

0 1 2 3 4 5 Old Sales 5,000 New Purchase -55,000 New Sales 6,000 Maintenance -2,500 Cost Savings 9000 9000 9000 9000 9000 Cash Flows -50,000 9,000 9,000 6,500 9,000 15,000 NPV -$8,493.15

Related Questions

Navigate

• Browse (All)
• Browse X
• Subjects

---

---

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