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 7%, 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 | $45,000 | 1 | $45,000 |
Sale value of old equipment | 0 | -$10,000 | 1 | -$10,000 |
Maintenance of new equipment | 3 | $2,000 | 0.816 | $1,632 |
Present value of cash outflows (A) | $36,632 | |||
Cash Inflows: | ||||
Annual cost savings | 1-5 | $10,000 | 4.100 | $41,000 |
Difference in Salvage value of old and new machine | 5 | $6,000 | 0.713 | $4,278 |
Present value of cash Inflows (B) | $45,278 | |||
NPV (B-A) | $8,646 |
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