Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $68,000 per year; operating costs with the new machine are expected to be $42,000 per year. The new machine will cost $71,000 and will last for 5 years, at which time it can be sold for $4,000. The current machine will also last for 5 more years but will have zero salvage value. Its current disposal value is $4,000.

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]

A. $29,731 B. $39,542 C. $52,591 D. $69,946 E. $93,028 F. $123,727

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		68,000	68000	0.92593	62,963
2		68,000	68000	0.85734	58,299
3		68,000	68000	0.79383	53,980
4		68,000	68000	0.73503	49,982
5		68,000	68000	0.68058	46,285
	Total present VALUE			271,510
Calculation of Present Value for New Machine
Year	Cost of Purchase/Disposal value	Operating Cost	Total Cash Outflow	PV Factor @ 8%	Present Value
0	67,000		67,000	1	67,000
1		42,000	42,000	0.92593	38,889
2		42,000	42,000	0.85734	36,008
3		42,000	42,000	0.79383	33,341
4		42,000	42,000	0.73503	30,871
5	(4,000)	42,000	38,000	0.68058	25,859
	Total PRESENT VALUE			231,969
Present Value of Current Machine		271,510
Present Value of New Machine		231,969
Net Present value of replacing machine		39,542
Correct Option B