Question

Station WJXT is considering the replacement of its old, fully depreciated sound mixer. Two new models are available. Mixer X costs $216,000, has a five-year expected life, and will generate after-tax cash flow savings of $68,200 per year. Mixer Y costs $345,000, has a ten-year expected life, and generates after-tax cash flow savings of $83,400 per year.

The cost of capital is 10 percent. Should WJXT replace the old mixer with mixer X or Y?

Answer 1

Solution :

The NPV of mixer X = $ 42,531.66

= $ 42,532 ( When rounded off to the nearest whole number )

The NPV of mixer Y = $ 167,456.90

= $ 167,457 ( When rounded off to the nearest whole number )

The Equivalent Annual Benefit of Mixer X = $ 11,219.74

= $ 11,220 ( When rounded off to the nearest whole number )

The Equivalent Annual Benefit of Mixer Y = $ 27,252.84

= $ 27,253 ( When rounded off to the nearest whole number )

Since mixer Y has the higher NPV of $ 167,457 as well a higher Equivalent annual benefit of $ 27,253, Mixer Y should be chosen.

WJXT should replace the old mixer with mixer Y.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.