Caine Bottling Corporation is considering the purchase of a new bottling machine
ID: 2527087 • Letter: C
Question
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $184,830 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 $33,600. 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 PV table.
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). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, e.g. 125.)
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
Calculate the net present value.
NPV = PV of all cash inflows - PV of all cash outflows
33600 * PVIFA ( 11 % , 8 ) - 184830
( 33600 * 5.1461 ) - 184830 =
172909 - 184830 = ( $ 11921 ) NPV
How much would the reduction in downtime have to be worth in order for the project to be acceptable?
For this the annual savings in downtime should be equal to $ 11921.
5.1461 * x = 11921
x = $ 2317 savings in annual downtime needed.