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Assuming a discount rate of 7%, what is the net present value of replacing the current machine with the new one?

Assuming a discount rate of 7%, what is the net present value of replacing the current machine with the new one?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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On January 1, 2021, X Company bought a machine for $42,000. It's now January 1, 2022, and management is disappointed that 2021 operating costs with the machine were $35,000. Since they are expecting future operating costs to continue to be $35,000 a year, they are considering replacing the machine with a new one. Although the new machine will cost $51,000, operating costs with the new machine will decrease by $8,000 each year. Both machines will last for 6 more years. The current machine can be sold immediately for $11,000 but will have no salvage value at the end of 6 years. The new machine will have a salvage value of $5,500 at the end of 6 years. Assuming a discount rate of 7%, what is the net present value of replacing the current machine with the new one?
Transcribed Image Text:On January 1, 2021, X Company bought a machine for $42,000. It's now January 1, 2022, and management is disappointed that 2021 operating costs with the machine were $35,000. Since they are expecting future operating costs to continue to be $35,000 a year, they are considering replacing the machine with a new one. Although the new machine will cost $51,000, operating costs with the new machine will decrease by $8,000 each year. Both machines will last for 6 more years. The current machine can be sold immediately for $11,000 but will have no salvage value at the end of 6 years. The new machine will have a salvage value of $5,500 at the end of 6 years. Assuming a discount rate of 7%, what is the net present value of replacing the current machine with the new one?
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