Question

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X Company is unhappy with a machine that they bought just a year ago for $44,000. It is considering replacing it with a new machine that will save significant operating costs. Operating costs with the current machine are $60,000 per year; operating costs with the new machine are expected to be $45,000 per year. Both machines will last for 6 more years.The current machine can be sold immediately for $5,000 but will have no salvage value at the end of 6 years. The new machine will cost $73,000 and have a salvage value of $1,000 in 6 years.

Assuming a discount rate of 7%, what is the net present value of replacing the current machine?

Tries 0/3

Answer 1

Note :

• Saving in operating costs due to replacement

= Operating costs with the current machine - Operating costs with the new machine = $60,000 - $45,000 = $15,000

• Intial outlay = Cost of new machine - Sales of current machine = $73,000 - $5,000 = $68,000

Answer :

Computation of Net present value

Particulars	Working	Present value ($)
Intial outlay		(68,000)
Saving in operating costs : $15,000 * PVIFA(7%, 6 years)	$15,000 * 4.76654	71,498
Salvage value of new machine : $1,000*PVIF(7%, 6 years)	$1,000 * 0.66634	666
Net present value		$4,164

Net present value of replacing the current machine : $4,164