Question

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]?

Answer 1

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%