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
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 $51,000. Disposal value at the end of its 6-year useful life will be $5,500.
The old equipment was purchased 3 years ago for $20,000. It can be sold immediately for $5,000 but will have zero disposal value in 6 years.
Maintenance work, costing $3,000, will be necessary on the old equipment in Year 4.
The new equipment will result in $10,000 of operating cost savings each year.
Assuming a discount rate of 8%, what is the net present value of replacing the old equipment with the new equipment? [Note: Use the Present Value tables in the Coursepack.]
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