You are operating an old machine that is expected to produce a cash inflow of $5
ID: 2810435 • Letter: Y
Question
You are operating an old machine that is expected to produce a cash inflow of $5,500 in each of the next 3 years before it fails. You can replace it now with a new machine that costs $20,500 but is much more efficient and will provide a cash flow of $10,750 a year for 4 years.
Calculate the equaivalent annual costs of the new machine if the discount rate is 14%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Should you replace your equipment now? (Yes, No)?
Equivalent annual costs of the purchase price ?????????????????????Explanation / Answer
Calculation of the equaivalent annual costs of the new machine Year 0 1 2 3 4 NPV Cost of new machine -$20,500.00 Incremental cash inflow $5,250.00 $5,250.00 $5,250.00 $5,250.00 Net Cash flow -$20,500.00 $5,250.00 $5,250.00 $5,250.00 $5,250.00 x Discount factor @ 14% 1 0.877193 0.769468 0.674972 0.59208 Present Values -$20,500.00 $4,605.26 $4,039.70 $3,543.60 $3,108.42 -$5,203.01 / Annuity Factor @ 14% for 4 year 2.9137123 Equivalent Annual cost of new machine -$1,785.70 Equivalent of annual cost of new machine = $1785.70 You should not replace equipment now. The answer is No.
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