Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $70,000 per year; operating costs with the new machine are expected to be $45,000 per year. The new machine will cost $66,000 and will last for 5 years, at which time it can be sold for $4,500. The current machine will also last for 5 more years but will have zero salvage value. Its current disposal value is $7,000.

Assuming a discount rate of 8%, what is the net present value of replacing the current machine?

A: $32,062

B: $37,512

C: $43,890

D: $51,351

E: $60,080

F: $70,294

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		70,000	70000	0.92593	64,815
2		70,000	70000	0.85734	60,014
3		70,000	70000	0.79383	55,568
4		70,000	70000	0.73503	51,452
5		70,000	70000	0.68058	47,647
	Total present VALUE			279,496
Calculation of Present Value for New Machine
Year	Cost of Purchase/Disposal value	Operating Cost	Total Cash Outflow	PV Factor @ 8%	Present Value
0	59,000		59,000	1	59,000
1		45,000	45,000	0.92593	41,667
2		45,000	45,000	0.85734	38,580
3		45,000	45,000	0.79383	35,722
4		45,000	45,000	0.73503	33,076
5	(4,500)	45,000	40,500	0.68058	27,559
	Total PRESENT VALUE			235,605
Present Value of Current Machine		279,496
Present Value of New Machine		235,605
Net Present value of replacing machine		43,890
Correct Option C