Question

You are operating an old machine that is expected to produce a cash inflow of $6,400...

You are operating an old machine that is expected to produce a cash inflow of $6,400 in each of the next 3 years before it fails. You can replace it now with a new machine that costs $21,400 but is much more efficient and will provide a cash flow of $12,100 a year for 4 years.

Calculate the equivalent annual cost of the new machine if the discount rate is 15%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Should you replace your equipment now?

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Answer #1

Answer : Calculation of Equivalent Annual Cost of New Machine :

Equivalent Annual Cost = Net Present Value / PVAF @15% for 4 years

Net Present Value = Present Value of Cash Inflow - Present Value of Cash Outflow

= (12100 * PVAF @15% for 4 years ) - 21400

= (12100 * 2.85497836268) - 21400

= 34545.2381884 - 21400

= 13145.2381884

Equivalent Annual Cost = 13145.2381884 / 2.85497836268

= 4604.32

No at present the machine should not be replacedvas the old machine is profucing more cash flows.

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