Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $61,000 per year; operating costs with the new machine are expected to be $41,000 per year. The new machine will cost $66,000 and will last for 6 years, at which time it can be sold for $4,500. The current machine will also last for 6 more years but will have zero salvage value. Its current disposal value is $7,000.

Assuming a discount rate of 7%, what is the net present value of replacing the current machine?

Answer 1

Calculation of Present VALUE for current Machine
Year	Cost of Purchase/Disposal value	Operating Cost	Total Cash Outflow	PV Factor @ 7%	Present Value
0			0	1	-
1		61,000	61000	0.934579	57,009
2		61,000	61000	0.873439	53,280
3		61,000	61000	0.816298	49,794
4		61,000	61000	0.762895	46,537
5		61,000	61000	0.712986	43,492
6		61,000	61000	0.666342	40,647
	Total present VALUE			290,759
Calculation of Present Value for New Machine
Year	Cost of Purchase/Disposal value	Operating Cost	Total Cash Outflow	PV Factor @ 7%	Present Value
0	59,000		59,000	1	59,000
1		41,000	41,000	0.934579	38,318
2		41,000	41,000	0.873439	35,811
3		41,000	41,000	0.816298	33,468
4		41,000	41,000	0.762895	31,279
5		41,000	41,000	0.712986	29,232
6	(4,500)	41,000	36,500	0.666342	24,321
	Total PRESENT VALUE			251,430
Present Value of Current Machine		290,759
Present Value of New Machine		251,430
Net Present value of replacing machine		39,329