Question

#7. 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 $50,000. Disposal value at the end of its 5-year useful life will be $5,500.
• The old equipment was purchased 3 years ago for $21,000. It can be sold immediately for $10,000 but will have zero disposal value in 5 years.
• Maintenance work, costing $3,500, 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 5%, what is the net present value of replacing the old equipment with the new equipment?

Answer 1

Calculation Of Net Present Value
Year	Particulars	Cash Flow	PV Factor	PV Of Cash Flow
		a	b=1/1.05^a	c=a*b
0	New equipment - sale value of old equipment	$ -40,000	1	$               -40,000
1	Operating cost saving	$     9,000	0.952381	$                   8,571
2	Operating cost saving	$     9,000	0.907029	$                   8,163
3	Operating cost saving	$     9,000	0.863838	$                   7,775
4	Operating cost saving - maintenance cost	$     5,500	0.822702	$                   4,525
5	Operating cost saving+ disposal value of new equipment	$   14,500	0.783526	$                 11,361
	Net Present Value			$                 395.23