Caine Bottling Corporation is considering the purchase of a new bottling machine
ID: 2481943 • Letter: C
Question
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $163,793 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $30,700. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 11%. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answer to 0 decimal places, e.g. 125.) Net present value $ How much would the reduction in downtime have to be worth in order for the project to be acceptable? (Round answer to 0 decimal places, e.g. 125.) $
Explanation / Answer
The discount factor for 8 years at 11% is 5.14612
5.14612 x 30,700 = $157,986
$157,986 - $163,793 = ($5,807) NPV
The reduction in downtime would have to have a present value of at least $5,807 in order for theproject to be acceptable
Now, we have to calculate what amount savings annually in down time will equal $5,807
5.14612 * X = 5,807
X = $1,128 savings in annual downtime needed.