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X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $68,000 per year; operating costs with the new machine are expected to be $36,530 per year. The new machine will cost $155,000 and will last for five years, at which time it can be sold for $1,500. The current machine will also last for five more years but will not be worth anything at that time. It cost $42,000 four years ago, but its current disposal value is only $5,000.

1. Assuming a discount rate of 7%, what is the incremental net present value of replacing the current machine?

2. Assume the following two changes: 1) both machines will last for six more years, 2) the salvage value of the new machine after six years will be zero. If X Company replaces the current equipment, what is the approximate internal rate of return?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92856582

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