Question

X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $64,000 per year; operating costs with the new machine are expected to be $35,385 per year. The new machine will cost $154,000 and will last for five years, at which time it can be sold for $2,500. The current machine will also last for five more years but will not be worth anything at that time. It cost $41,000 four years ago, but its current disposal value is only $4,000.

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

B) Assume the following two changes: 1) both machines will last for six more years, 2) the salvage value of the new machine after six years will be zero. If X Company replaces the current equipment, what is the approximate internal rate of return [enter your answer as .XX, so 1% would be .01]?

Answer 1