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 $47,000. Disposal value at the end of its 5-year useful life will be $5,000.
• The old equipment was purchased 3 years ago for $23,000. It can be sold immediately for $5,000 but will have zero disposal value in 5 years.
• Maintenance work, costing $3,000, will be necessary on the old equipment in Year 3.
• The new equipment will result in $9,000 of operating cost savings each year.

Assuming a discount rate of 6%, 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: $1,384

B: $1,730

C: $2,163

D: $2,704

E: $3,380

F: $4,225

Answer 1

Calculation Of Net Present Value
Year	Particulars	Cash Flow	PV Factor	PV Of Cash Flow
		a	b=1/1.06^a	c=a*b
0	New equipment - sale value of old equipment	$ -42,000	1	$               -42,000
1	Operating cost saving	$     9,000	0.9434	$                   8,491
2	Operating cost saving	$     9,000	0.8900	$                   8,010
3	Operating cost saving + saving in maintenance cost of old	$   12,000	0.8396	$                 10,075
4	Operating cost saving	$     9,000	0.7921	$                   7,129
5	Operating cost saving+ disposal value of new equipment	$   14,000	0.7473	$                 10,462
	Net Present Value			$                   2,163
	Correct Option :C.2163