Question

X Company is trying to decide whether to continue using old equipment to make Product A or replace it with new equipment that will have lower operating costs. The following information is available:

• The new equipment will cost $55,000. Disposal value at the end of its 5-year useful life will be $6,000.
• The old equipment was purchased 3 years ago for $24,000. It can be sold immediately for $5,000 but will have zero disposal value in 5 years.
• Maintenance work, costing $2,500, will be necessary on the new equipment in Year 4.
• The new equipment will result in $9,500 of operating cost savings each year.

Assuming a discount rate of 4%, what is the net present value of replacing the old equipment with the new equipment?

Answer 1

Ans:

Net present value for replacing the old equipment with the new equipment is -$4,913.

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