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 $10,000 Final sales value 3,000 Operating costs 69,500 New equipment Purchase cost $48,000 Final sales value 7,000 Operating costs 60,500 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 5%, what is the net present value of replacing the current equipment?

Explanation / Answer

NPV of replacing the current equipment = 363812.7624 - 349855.8623 = $13957

NPV of Current Equipment: Year Cash Flow PVF (5%) PV of Cash Flow 0 -10000 1 -10000 1 -69500 0.952380952 -66190.47619 2 -69500 0.907029478 -63038.54875 3 -69500 0.863837599 -60036.7131 4 -69500 0.822702475 -57177.822 4 -4000 0.822702475 -3290.809899 5 -69500 0.783526166 -54455.06857 6 -69500 0.746215397 -51861.97007 6 3000 0.746215397 2238.64619 -363812.7624 NPV of new equipment: Year Cash Flow PVF (5%) PV of Cash Flow 0 -48000 1 -48000 1 to 6 -60500 5.075692067 -307079.3701 6 7000 0.746215397 5223.507779 -349855.8623

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