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Question 7 X Company is trying to decide whether to continue using old equipment to make...

    1. Question 7

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:

  • The new equipment will cost $45,000. Disposal value at the end of its 5-year useful life will be $6,000.
  • The old equipment was purchased 3 years ago for $23,000. It can be sold immediately for $10,000 but will have zero disposal value in 5 years.
  • Maintenance work, costing $2,000, will be necessary on the new equipment in Year 3.
  • The new equipment will result in $10,000 of operating cost savings each year.

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.]

Homework Answers

Answer #1

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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