Question

# X Company is considering replacing one of its machines in order to save operating costs. Operating...

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are \$62,000 per year; operating costs with the new machine are expected to be \$31,490 per year. The new machine will cost \$157,000 and will last for four years, at which time it can be sold for \$2,000. The current machine will also last for four more years but will not be worth anything at that time. It cost \$40,000 four years ago, but its current disposal value is only \$7,000.

9. Assuming a discount rate of 8%, what is the incremental net present value of replacing the current machine?

 Incorrect. Tries 1/3 Previous Tries

10. Assume the following two changes: 1) both machines will last for six more years, 2) the salvage value of the new machine after six years will be zero. If X Company replaces the current equipment, what is the approximate internal rate of return [enter your answer as .XX, so 1% would be .01]?

 Req 9: Net present value: Saving in cost: 30510 (62000-31490) Annuity for 4 years at 8% 3.3121 Present value of Savings in cost 101052.2 Add: Present value of Salvage 1470 (\$ 2000*PVF i.e. 0.735) Present value of inflows 102522.2 Less: Net initial investment 150000 (\$ 157000-7000) NPV -47477.8 Req 10. IRR: Saving in cost: 30510 (62000-31490) Annuity for 6 years at 6% 4.917 Present value of Savings in cost 150017.7 Less: Net initial investment 150000 (\$ 157000-7000) NPV 17.67 Hence, IRR = 6%

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