Question

The company is trying to decide whether to continue using old equipment to make product or replace it with new equipment that will have lower operating costs. The following information is available:

The new equipment will cost $46,000. Disposal value at the end of its 6-year useful life will be $5,500.

The old equipment was purchased 3 years ago for $21,000. It can be sold immediately for $10,000 but will have zero disposal value in 6 years.

Maintenance work costs $3,000 and will be necessary on the new equipment in Year 3.

The new equipment will result in $9,500 of operating cost savings each year.

Assuming a discount rate of 6%, what is the net present value of replacing the old equipment with the new equipment?

Answer 1