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 $45,000. 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 $10,000 but will have zero disposal value in 6 years. Maintenance work, costing $2,500, will be necessary on the old equipment in Year 4. The new equipment will result in $10,000 of operating cost savings each year. Assuming a discount rate of 7%, 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: $9,510 B: $11,887 C: $14,859 D: $18,574 E: $23,217 F: $29,021

Answer 1

Correct Option : D

Calculation of Present Value if equipment replaced
Year	Cash Flow	Present value factor @7%	Presnt Value
0	-35000	1.0000	(35,000)
1	10000	0.9346	9,346
2	10000	0.8734	8,734
3	10000	0.8163	8,163
4	12500	0.7629	9,536
5	10000	0.7130	7,130
6	16000	0.6663	10,661
	Net present value	18,574
	net present value of replacing the old equipment with the new equipment is $18574
Caluclation of Cash Flow
Year	Cost of Buying new equipment	Salvage value of old equipment	Operating Cost saving due to new equipment	Maintenance Cost saving due to new equipment	SALVAGE VALUE OF NEW EQUIPMENT	Total
0	-45000	10000				-35000
1			10000			10000
2			10000			10000
3			10000			10000
4			10000	2500		12500
5			10000			10000
6			10000		6000	16000