Caine Bottling Corporation is considering the purchase of a new bottling machine
ID: 2531024 • Letter: C
Question
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $202,121 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 $34,500. 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 9%. 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
Net present value (NPV)
= Present Vale of cash flows – Initial Investment
= $34,500 x (PVAF 9%,8Years) - $2,02,121
= [ $34,500 x 5.53482] - $2,02,121
= $1,90,951 - $2,02,121
= - $11,170 (Negative)
Net present value = - $11,170 (Negative)
The reduction in downtime would have to have a present value of at least $11,170 in order for the project to be acceptable.