10/26/13

Google Answers: calculate the NPV of replacing existing equipment

View Question Q: calculate the NPV of replacing existing equipment ( Answered Question , 1 Comment )

Subject: calculate the NPV of replacing existing equipment Posted: 19 Aug 2006 10:04 PDT Category: Business and Money > Finance Expires: 18 Sep 2006 10:04 PDT Asked by: dj555-ga Question ID: 757649 List Price: $20.00 A B Ci n d u s t r i e si sc o n s i d e r i n gan e wa s s e m b l yl i n ec o s t i n g$ 6 , 0 0 0 , 0 0 0 . T h ea s s e m b l yl i n ew i l lb ef u l l yd e p r e c i a t e db yt h es i m p l i f i e ds t r a i g h t l i n em e t h o do v e ri t s5y e a rd e p r e c i a b l el i f e . O p e r a t i n gc o s t so ft h e n e wm a c h i n ea r ee x p e c t e dt ob e1 , 1 0 0 , 0 0 0p e ry e a r . T h ee x i s t i n ga s s e m b l yl i n eh a s5y e a r sr e m a i n i n gb e f o r ei tw i l lb e f u l l yd e p r e c i a t e da n dh a san e tb o o kv a l u eo f$ 3 , 0 0 0 , 0 0 0 . I fs o l d t o d a yt h ec o m p a n yw o u l dr e c e i v e$ 2 , 4 0 0 , 0 0 0f o rt h ee x i s t i n gm a c h i n e . A n n u a lo p e r a t i n gc o s t so nt h ee x i s t i n gm a c h i n ea r e$ 2 , 1 0 0 , 0 0 0p e r y e a r . A B Ci si nt h e4 6p e r c e n tm a r g i n a lt a xb r a c k e ta n dh a sa r e q u i r e dr a t eo fr e t u r no f1 2p e r c e n t . C a l c u l a t et h en e tp r e s e n tv a l u eo fr e p l a c i n gt h ee x i s t i n gm a c h i n e .

Answer
Subject: Re: calculate the NPV of replacing existing equipment Answered By: elmarto-ga on 21 Aug 2006 08:58 PDT Rated: H e l l o ! I no r d e rt of i n dt h ep r e s e n tv a l u eo fr e p l a c i n gt h em a c h i n e ,w em u s t c a l c u l a t et h ei n c r e m e n t a lc a s hf l o w st h a tr e s u l tf r o md o i n gi t . F i r s to fa l l ,n o t i c et h a tt h en e wm a c h i n ew i l lr e p r e s e n ta$ 1 , 0 0 0 , 0 0 0 s a v i n g sp e ry e a ri no p e r a t i n gc o s t s .G i v e nt h a tt h et a xr a t ei s4 6 % , t h e n , A f t e r t a xS a v i n g si no p e r a t i n gc o s t s=( 1-0 . 4 6 ) * 1 0 0 0 0 0 0=$ 5 4 0 , 0 0 0 T h e r ew i l la l s ob es o m es a v i n g sd u et ot h ef a c tt h a tt h ed e p r e c i a t i o n t a xs h i e l dw i l lb eg r e a t e rf o rt h en e wm a c h i n e .T h ed e p r e c i a t i o nf o r t h en e wm a c h i n ew i l lb e$ 1 , 2 0 0 , 0 0 0p e ry e a rf o rt h en e x t5y e a r s ( s i n c ei t sc o s ti s$ 6 , 0 0 0 , 0 0 0a n di tw i l lb ed e p r e c i a t e ds t r a i g h tl i n e d u r i n gi t s5 y e a rl i f e ) .T h ed e p r e c i a t i o nf o rt h eo l dm a c h i n ew o u l db e $ 6 0 0 , 0 0 0p e ry e a r( i t sc u r r e n tb o o kv a l u ei s$ 3 , 0 0 0 , 0 0 0a n di tw i l lb e d e p r e c i a t e ds t r a i g h tl i n ef o rt h en e x t5y e a r su n t i lf u l l d e p r e c i a t i o n ) .C l e a r l y ,t h u s , I n c r e m e n t a lD e p r e c i a t i o n=1 2 0 0 0 0 0-6 0 0 0 0 0=$ 6 0 0 , 0 0 0 T h et a xs h i e l dg e n e r a t e db yt h i sd e p r e c i a t i o nw i l lb e : T a xS h i e l d=0 . 4 6*6 0 0 0 0 0=$ 2 7 6 , 0 0 0 T h e r e f o r e ,w ef i n dt h a t : I n c r e m e n t a lC a s hF l o w s=5 4 0 0 0 0+2 7 6 0 0 0=$ 8 1 6 , 0 0 0p e ry e a r ,f o r5y e a r s . L e t ' sn o wf i n dt h ei n i t i a lc a p i t a lo u t l a y .W ek n o wt h a tt h eo l d m a c h i n ei sb e i n gs o l d$ 2 , 4 0 0 , 0 0 0 ,w h i l ei t sb o o kv a l u ei s$ 3 , 0 0 0 , 0 0 0 . T h e r e f o r e ,t h ea f t e r t a xs a l v a g ev a l u ei s : A f t e r T a xS a l v a g eV a l u e=2 4 0 0 0 0 0-0 . 4 6 * ( 2 4 0 0 0 0 0-3 0 0 0 0 0 0 )=$ 2 , 6 7 6 , 0 0 0 N o w ,s i n c et h en e wm a c h i n ec o s t s$ 6 , 0 0 0 , 0 0 0 ,w eg e tt h a tt h ei n i t i a l c a p i t a lo u t l a yi s :6 0 0 0 0 0 0-2 6 7 6 0 0 0=$ 3 , 3 2 4 , 0 0 0 . S on o ww eh a v ea l lt h ei n c r e m e n t a lc a s hf l o w sg e n e r a t e db yt h e r e p l a c e m e n to ft h em a c h i n e .W ek n o wt h a tan e t$ 3 , 3 2 4 , 0 0 0w i l lh a v et o
answers.google.com/answers/threadview/id/757649.html 1/2

10/26/13

Google Answers: calculate the NPV of replacing existing equipment

b ep a i dt o d a yf o rt h er e p l a c e m e n t ,a n dan e t$ 8 1 6 , 0 0 0w i l lb e " r e c e i v e d "e a c hy e a rf o rt h en e x t5y e a r s .T h e r e f o r e ,a ta1 2 % r e q u i r e dr a t eo fr e t u r n ,t h ep r e s e n tv a l u eo ft h er e p l a c e m e n ti s : N P V=3 , 3 2 4 , 0 0 0+8 1 6 , 0 0 0 / 1 . 1 2+8 1 6 , 0 0 0 / 1 . 1 2 ^ 2+. . .+8 1 6 , 0 0 0 / 1 . 1 2 ^ 5 N P V=3 8 2 , 5 0 3 S i n c et h eN P Vi sn e g a t i v e ,t h em a c h i n es h o u l dn o tb er e p l a c e d .

I ' v ea l s ow r i t t e nt h i sa n a l y s i si na nE x c e lf i l e .Y o uc a nd o w n l o a di tf r o m h t t p : / / w w w . f i l e f a c t o r y . c o m / f i l e / b f e 5 3 4 / F o ra n o t h e r" R e p l a c e m e n tP r o b l e m "e x a m p l e ,l o o ka tt h i sp d fd o c u m e n t : h t t p : / / w w w . u t d a l l a s . e d u / ~ r a b i h / d o c s / o h _ c h 1 0 . p d f # s e a r c h = % 2 2 % 2 2 a f t e r % 2 0 t a x % 2 0 s a l v a g e % 2 0 v a l u e % 2 2 % 2 2

Ih o p et h i sh e l p s !I fy o uh a v ea n yd o u b tr e g a r d i n gm ya n s w e r ,p l e a s e d o n ' th e s i t a t et or e q u e s tc l a r i f i c a t i o nb e f o r er a t i n gi t .O t h e r w i s e ,I a w a i ty o u rr a t i n ga n df i n a lc o m m e n t s . B e s tw i s h e s ! e l m a r t o

dj555-ga rated this answer:

and gave an additional tip of: $10.00

T h a n ky o u ! F u l l ya n s w e r e d ,w i t hac l e a re x p l a n a t i o nf o re a c hs t e p . Y o u ri n c l u s i o no ft h eE x c e lf i l ew a sa b o v ea n db e y o n d . T h a n ky o uf o r aj o bw e l ld o n e .

Comments
Subject: Re: calculate the NPV of replacing existing equipment From: ubiquity-ga on 21 Aug 2006 10:57 PDT A c t u a l l y ,t h e r ei sn o te n o u g hi n f o r m a t i o nt oa n s w e rt h eq u e s t i o n . 1 .O n em u s tk n o wt h el i f eo ft h eo l da n dn e wm a c h i n e . Ik n o wi tw i l l f u l l yd e p r e c i a t ei n5y e a r s . T h a ti sm e r e l ya na c c o u n t i n g( t a x ) s c h e d u l e . t h em a c h i n e sm a ys u r v i v ea n db ep r o d u c t i v ew e l lb e y o n dt h e f i v ey e a r . S o ,u n l e s sy o ua r ea s s u m i n gt h a tt h em a c h i n e sl i f em a t c h e s t h ed e p r e c i a t i o ns c h e d u l e ,y o ud on o th a v es u f f i c i e n ti n f o r m a t i o nt o a n s w e rt h eq u e s t i o n . Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service. If you feel that you have found inappropriate content, please let us know by emailing us at answers-support@google.com with the question ID listed above. Thank you. Search Answers

Search Google Answers for

Google Home - Answers FAQ - Terms of Service - Privacy Policy

answers.google.com/answers/threadview/id/757649.html

2/2