Question

9. X Company currently buys 10,000 units of a component part each year from a supplier for $7.10 each but is considering making them instead. Variable costs of making would be $4.90 per unit; additional annual fixed costs would be $6,000. Equipment would have to be purchased for $33,000 and will last for 7 years, at which time it will have a disposal value of $5,000. Assuming a discount rate of 4%, what is the net present value of making the part instead of continuing to buy it?

10. 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	6,500
Operating costs	64,500
New equipment
Purchase cost	$46,000
Final sales value	6,500
Operating costs	55,000

Maintenance work will be necessary on the new equipment in Year 3, costing $2,000. The current equipment will last for five more years; the life of the new equipment is also five years. Assuming a discount rate of 4%, what is the net present value of replacing the current equipment?

Answer 1

9.)
No. of Units	10000
Variable Cost	49000
Buying	71000
Years	1	2	3	4	5	6	7
Equipment Purchase	33000
Variable Cost	49000	49000	49000	49000	49000	49000	49000
Equipment Sale							-5000
Fixed Cost	6000	6000	6000	6000	6000	6000	6000
TOTAL	88000	55000	55000	55000	55000	55000	50000
PV factor 4%	0.961538462	0.924556213	0.888996359	0.854804191	0.821927107	0.790314526	0.759917813
Discounted Value	85884.61538	50850.59172	48894.79973	47014.23051	45205.99087	43467.29892	37995.89066
TOTAL COST	359313.42
On Buying the Product
Discounted Value	68269.23077	65643.49112	63118.74147	60691.09756	58356.82458	56112.33133	53954.16474
TOTAL COST	426145.8816
NPV of Cost Savings	66832.46	ANS
2.)
NPV OF REPLACING THE CURRENT EQUIPMENT
OLD EQUIPMENT			0	1	2	3	4	5
Operating Cost				$64,500.00	$64,500.00	$64,500.00	$64,500.00	$64,500.00
Sale of Equipment								$6,500
Cash Flows				$64,500.00	$64,500.00	$64,500.00	$64,500.00	$58,000.00
Discount @ 4%				0.961538462	0.924556213	0.888996359	0.854804191	0.821927107
PV				$62,019.23	$59,633.88	$57,340.27	$55,134.87	$47,671.77
NPV of OLD				$281,800.01
			0	1	2	3	4	5
New Equipment
Operating Cost			$46,000.00	$55,000.00	$55,000.00	$55,000.00	$55,000.00	$55,000.00
Sale of Equipment								$6,500
Repairs						$2,000.00
Cash Flows			$46,000.00	$55,000.00	$55,000.00	$57,000.00	$55,000.00	$48,500.00
Discount @ 4%			1	0.961538462	0.924556213	0.888996359	0.854804191	0.821927107
PV			$46,000.00	$52,884.62	$50,850.59	$50,672.79	$47,014.23	$39,863.46
NPV of OLD				$287,285.69
Net Present Value of replacing the old				$5,485.68	ANS
				$5,486	ROUND OFF

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