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 $10,000 2,000 61,500 New equipment Purchase cost Final sales value Operating cost savings $48,000 5,500 8,500 Maintenance work will be necessary on the new equipment in Year 4, costing $2,500. The current equipment will last for 6 more years, the life of the new equipment is also 6 years. Assuming a discount rate of 6%, what is the net present value of replacing the current equipment? 7102 Submit Answer Incorrect. Tries 2/5 Previous Tries

Explanation / Answer

Or Net present value = $5,694

Year Cash flow PVF@6% Present value 0 $       (38,000)                1.000 $       -38,000.00 1 $            8,500                0.943 $           8,018.87 2 $            8,500                0.890 $           7,564.97 3 $            8,500                0.840 $           7,136.76 4 $            6,000                0.792 $           4,752.56 5 $            8,500                0.747 $           6,351.69 6 $          14,000                0.705 $           9,869.45 Net Present value $           5,694.31

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