Question

s X Company is considering reclacing one of machines in order to averting costs Operating costs with the current machine are 56200 per t machine are sected to be $44.000 per year. The new machine w cost $74,000 and will stor ve year, which it can be the for five more years but will not be worth anything at that time. It cost $14,000 three years ago but currently worth only 14,000. Assuming a discount rate of Incrementalnet recent value of replacing the current machine with the new machine incorrect. Tries 1/3 Previous Tres what is the Communication Blocked Send Feedback

Answer 1

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Given in Question New Machine $44000/yr $ 74,000 Particulars Old Machine Operating cost $62000/yr Machine cost $34000 3 years back Old machine market value $ 4,000 Life of machine 5 years Salvage value - Discount Rate 5% Required Incremental present value of replacing machine 5 years $3,000 Solution Step-1 Net Cash Outflow(Assumed at current time/[present value of cost] Cost of new equipment - Market Value of equipment $74000 - $4000 ► $70,000(A) Net Outflow Step-11 Change in cash flow per year if decision is implemented i.e. Change in operating costs $62,000 - $44,000 $18000(B) Change in cash flow

Step-111 Present valueof benefits i.e. present value of (B) + present value of salvage value of new machine + 18000*PVAF(5%,5) 18000*4.3294 $ 77,930.60 + 3000*PVIF(5%,5) 3000*0.7835 $ 2,350.50 $80281.1 (C) + Step-IV Net Present Value [C-A] $80281.1 - $70000 $ 10,281 Incremental NPV As NPV in +ve, old machine should be replaced with new Machine