X Company must decide whether to continue using its current equipment or replace
ID: 2787874 • Letter: X
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 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 8%, what is the net present value of replacing the current equipment?
Current equipment Current sales value $5,000 Final sales value 3,500 Operating costs 65,000 New equipment Purchase cost $47,000 Final sales value 7,000 Operating cost savings 8,500Explanation / Answer
Year
Cash Flow
PV Factor Formula
PV Factor @ 8%
PV
0
$ (42,000)
1/(1+0.08)^0
1.00000
$ (42,000.00)
1
$ 8,500
1/(1+0.08)^1
0.92593
$ 7,870.37
2
$ 8,500
1/(1+0.08)^2
0.85734
$ 7,287.38
3
$ 6,000
1/(1+0.08)^3
0.79383
$ 4,762.99
4
$ 8,500
1/(1+0.08)^4
0.73503
$ 6,247.75
5
$ 15,500
1/(1+0.08)^5
0.68058
$ 10,549.04
NPV
$ (5,282.46)
Capital investment = $ 47,000 - $ 5,000 = $ 42,000
Year 3rd cash flow = $ 8,500 - $ 2,500 = $ 6,000
Year 5th cash flow = $ 8,500 + $ 7,000 = $ 15,500
Year
Cash Flow
PV Factor Formula
PV Factor @ 8%
PV
0
$ (42,000)
1/(1+0.08)^0
1.00000
$ (42,000.00)
1
$ 8,500
1/(1+0.08)^1
0.92593
$ 7,870.37
2
$ 8,500
1/(1+0.08)^2
0.85734
$ 7,287.38
3
$ 6,000
1/(1+0.08)^3
0.79383
$ 4,762.99
4
$ 8,500
1/(1+0.08)^4
0.73503
$ 6,247.75
5
$ 15,500
1/(1+0.08)^5
0.68058
$ 10,549.04
NPV
$ (5,282.46)
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