In: Accounting
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:
Assuming a discount rate of 4%, what is the net present value of replacing the old equipment with the new equipment?
Calculation of Present Value if equipment replaced | ||||||
Year | Cash Flow | Present value factor @4% | Presnt Value | |||
0 | -46000 | 1.0000 | (46,000) | |||
1 | 8500 | 0.9615 | 8,173 | |||
2 | 8500 | 0.9246 | 7,859 | |||
3 | 12000 | 0.8890 | 10,668 | |||
4 | 8500 | 0.8548 | 7,266 | |||
5 | 13500 | 0.8219 | 11,096 | |||
Net present value | (938) | |||||
net present value of replacing the old equipment with the new equipment is $938 Negative | ||||||
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 | -51000 | 5000 | -46000 | |||
1 | 8500 | 8500 | ||||
2 | 8500 | 8500 | ||||
3 | 8500 | 3500 | 12000 | |||
4 | 8500 | 8500 | ||||
5 | 8500 | 5000 | 13500 | |||