rm ahuja

Current equipment purchased 18 years ago cost $2,000,000 (no salvage value) could be sold for $150,000

Cost of new equipment $2,850,000

Salvage value at the end of 10 years $525,000

Operating costs will decrease 30% year 1-3 and 10% year 4 and on

Need to hire another operator at an annual cost of $30,000

Capital cost 12%

1) Calculate initial investment

2) Calculate NPV of investing in new equipment

3) If payback period is 8 years, should the company replace the equipment now?