Shamrock Ltd faces the choice of replacing some of its equipment immediately or continuing with the old equipment for a further three years. The old equipment needs constant maintenance, often breaks down and presents an environmental problem. It is expected that the new equipment will be super ceded in three years by new technology and will have to be replaced. Its market value at that point is estimated to be $60,000.
The estimates for the two alternatives are as follows:

For new capital projects the required rate of return is set at 15%.
The old equipment has a current trade-in value of $3000.
Required:
a) Calculate the net present value for each of the two alternatives and make a recommendation based on the results of your calculations. Ignore tax considerations.
b) List three other considerations that should be taken into account in making a final decision, besides the net present value calculation in part a).

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Retain old equipment Replace now Initial cost S480 000 Nil S90 000 p.a. due to increase in capacity $15 000 S100 000 p.a. Maintenance Cost Additional cash flows (Years 1-3) Cost of training for handling of new equipment on installation