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 $53,000. Disposal value at the end of its 6-year useful life will be $6,000.
• The old equipment was purchased 3 years ago for $20,000. It can be sold immediately for $5,000 but will have zero disposal value in 6 years.
• Maintenance work, costing $4,000, will be necessary on the new equipment in Year 4.
• The new equipment will result in $9,000 of operating cost savings each year.

Assuming a discount rate of 8%, what is the net present value of replacing the old equipment with the new equipment? [Note: Use the Present Value tables in the Coursepack.]

A: $-5,553

B: $-6,275

C: $-7,091

D: $-8,012

E: $-9,054

F: $-10,231

Answer 1

Year	Particulars	Cash Flow	PV Factor	PV Of Cash Flow
		a	b=1/1.08^a	c=a*b
0	New equipment - sale value of old	$ -48,000	1	$               -48,000
1	Operating cost saving	$     9,000	0.925925926	$                   8,333
2	Operating cost saving	$     9,000	0.85733882	$                   7,716
3	Operating cost saving	$     9,000	0.793832241	$                   7,144
4	Operating cost saving - maintenance cost	$     5,000	0.735029853	$                   3,675
5	Operating cost saving	$     9,000	0.680583197	$                   6,125
6	Operating cost saving+ disposal value of new equipment	$   15,000	0.630169627	$                   9,453
		NPV		$                 -5,553
	Correct Option :A.5553