X Company is trying to decide whether to continue using old equipment to make Product A or replace it with new equipment that will have lower operating costs. The following information is available:
Assuming a discount rate of 5%, what is the net present value of replacing the old equipment with the new equipment? [Note: Use the Present Value tables in the Coursepack.]
Solution:
Computation of NPV - Replacement proposal of Equipment - X Company | ||||
Particulars | Period | Amount | PV Factor | Present Value |
Cash Outflows: | ||||
Cost of new Equipment | 0 | $52,000 | 1 | $52,000 |
Sale value of old equipment | 0 | -$5,000 | 1 | -$5,000 |
Maintenance of new equipment | 4 | $3,000 | 0.823 | $2,469 |
Present value of cash outflows (A) | $49,469 | |||
Cash Inflows: | ||||
Annual cost savings | 1-5 | $9,500 | 4.329 | $41,126 |
Difference in Salvage value of old and new machine | 5 | $7,000 | 0.784 | $5,488 |
Present value of cash Inflows (B) | $46,614 | |||
NPV (B-A) | -$2,856 |
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