Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $67,000 per year; operating costs with the new machine are expected to be $45,000 per year. The new machine will cost $74,000 and will last for 4 years, at which time it can be sold for $4,500. The current machine will also last for 4 more years but will have zero salvage value. Its current disposal value is $6,000.

Assuming a discount rate of 8%, what is the net present value of replacing the current machine? [Note: For the capital budgeting questions, use the Present Value tables in the Coursepack or with the link after the last question.]

Answer 1

Calculation of Present VALUE for current Machine
Year	Cost of Purchase/Disposal value	Operating Cost	Total Cash Outflow	PV Factor @ 8%	Present Value
0			0	1	-
1		67,000	67000	0.925926	62,037
2		67,000	67000	0.857339	57,442
3		67,000	67000	0.793832	53,187
4		67,000	67000	0.73503	49,247
	Total present VALUE				221,912
Calculation of Present Value for New Machine
Year	Cost of Purchase/Disposal value	Operating Cost	Total Cash Outflow	PV Factor @ 8%	Present Value
0	68,000		68,000	1	68,000
1		45,000	45,000	0.925926	41,667
2		45,000	45,000	0.857339	38,580
3		45,000	45,000	0.793832	35,722
4	(4,500)	45,000	40,500	0.73503	29,769
	Total PRESENT VALUE				213,738
Present Value of Current Machine		221,912
Present Value of New Machine		213,738
Net Present value of replacing machine		8,174