Question

X Company is unhappy with a machine that they bought just a year ago for $43,000. It is considering replacing it with a new machine that will save significant operating costs. Operating costs with the current machine are $68,000 per year; operating costs with the new machine are expected to be $50,000 per year. Both machines will last for 4 more years.The current machine can be sold immediately for $4,000 but will have no salvage value at the end of 4 years. The new machine will cost $71,000 and have a salvage value of $2,500 in 4 years.

Assuming a discount rate of 5%, what is the net present value of replacing the current machine?

Answer 1

Net present value of replacing the current machine is:

Replacing Machine	Year 0	Year 1	Year 2	Year 3	Year 4	Total
Cost of new machine	($71,000)					($71,000)
Sale of old machine	$4,000					$4,000
Salvage Value					2,500	$2,500
Saving of operating costs		18,000	18,000	18,000	18,000	($108,000)
Net Cash Flow	($67,000)	$18,000	$18,000	$18,000	$20,500	($67,000)
Discount rate 5% , Life 4 years
Present Value factor	1	0.952	0.907	0.864	0.823
Present Value of Net Cash flow	-67,000	17,143	16,327	15,549	16,865	($1,116)
Net Present value	-67,000	17,143	16,327	15,549	16,865	($1,116)