Question
On January 1, 2021, X Company bought a machine for $45,000. It's now January 1, 2022, and management is disappointed that 2021 operating costs with
On January 1, 2021, X Company bought a machine for $45,000. It's now January 1, 2022, and management is disappointed that 2021 operating costs with the machine were $34,000. Since they are expecting future operating costs to continue to be $34,000 a year, they are considering replacing the machine with a new one. Although the new machine will cost $45,000, operating costs with the new machine will decrease by $11,000 each year. Both machines will last for 4 more years. The current machine can be sold immediately for $8,000 but will have no salvage value at the end of 4 years. The new machine will have a salvage value of $4,500 at the end of 4 years. Assuming a discount rate of 5%, what is the net present value of replacing the current machine with the new one?
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