Question

X Company must decide whether to continue using its current equipment or replace it with new, more efficient equipment. The following information is available for the current and new equipment:

Current equipment
Current sales value	$10,000
Final sales value	5,000
Operating costs	62,000
New equipment
Purchase cost	$49,000
Final sales value	5,000
Operating cost savings	9,000

Maintenance work will be necessary on the new equipment in Year 3, costing $2,500. The current equipment will last for six more years; the life of the new equipment is also six years. Assuming a discount rate of 4%, what is the net present value of replacing the current equipment?

Answer 1

Answer:

the net present value of replacing the current equipment:

Cash Outflow1:

Present cash outflow flow at year 1 for purchase of new equipment=Purchase Cost-Current sale Value of Old Equipment

=$ 49,000-$9,000=$40,000

Cash Outflow2:

Maintenance work will be necessary on the new equipment in Year 3, so Cash out flow=$2,500

Cash Inflow 1:

Operating cost savings from year1 to Year 6=$9,000 per year

Cash Inflow 2:

OpFinal Sale Value new equipment in Year 6=$9,000

Present Value Formula fro nth year@r%=1/(1+r)ⁿ

Here r= Discount rate

n= nth year

The net present value of replacing the current equipment:

Year	Cash Out flow-1	Cash Out flow-2	Total Cash Outflow=A	Cash In flow-1	Cash In flow-2	Total Cash Outflow=B	Net Cash flow=B-A	PV@4%	NPV
1	40,000	-	40,000	9,000		9,000	-31,000	0.9615	-29,805.50
2	-	-	-	9,000		9,000	9,000	0.9245	8,320.50
3	-	2,500	2,500	9,000		9,000	6,500	0.8890	5,778.50
4	-	-	-	9,000		9,000	9,000	0.8548	7,693.20
5	-	-	-	9,000		9,000	9,000	0.8219	7,397.10
6	-	-	-	9,000	9,000	18,000	18,000	0.7903	14,225.40
			42,500			63,000			13,609.20