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 $48,000. Disposal value at the end of its 5-year useful life will be $7,000.
  • The old equipment was purchased 3 years ago for $22,000. It can be sold immediately for $5,000 but will have zero disposal value in 5 years.
  • Maintenance work, costing $4,000, will be necessary on the old equipment in Year 3.
  • The new equipment will result in $8,500 of operating cost savings each year.

Assuming a discount rate of 7%, what is the net present value of replacing the old equipment with the new equipment?

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