Problem - Given
Current equipment purchased 18 years ago cost $2,000,000 (no salvage value) could be sold for $150,000
Cost of new equipment $2,850,000
Salvage value at the end of 10 years $525,000
Operating costs will decrease 30% year 1-3 and 10% year 4 and on
Need to hire another operator at an annual cost of $30,000
Capital cost 12%
1) Calculate initial investment?
2) Calculate NPV of investing in new equipment?
3) If payback period is 8 years, should the company replace the equipment now?