X Company must decide whether to continue using its current equipment or replace
ID: 2787884 • 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 current equipment in Year 3, costing $3,000. The current equipment will last for 5 more years; the life of the new equipment is also 5 years. Assuming a discount rate of 8%, what is the net present value of replacing the current equipment?
Current equipment Current sales value $5,000 Final sales value 3,000 Operating costs 64,500 New equipment Purchase cost $52,000 Final sales value 5,500 Operating cost savings 8,500Explanation / Answer
Calculation of net present value of replacing the current equipment Year 0 1 2 3 4 5 NPV Purchase of new equipment -$52,000 Sale of current equipment $5,000 Saving in operating cost $8,500 $8,500 $8,500 $8,500 $8,500 Saving in maintenance cost of current equipment $3,000 Incremental Final Sale value of Equipment $2,500 Net Cash flow -$47,000 $8,500 $8,500 $11,500 $8,500 $11,000 Discount factor @ 8% 1 0.925926 0.857339 0.793832 0.73503 0.680583 Present Values -$47,000.00 $7,870.37 $7,287.38 $9,129.07 $6,247.75 $7,486.42 -$8,979.01 Net present value of replacing the current equipment = -$8979.01
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