Question

Larry’s Lawn Service needs to purchase a new lawnmower costing $8,416 to replace an old lawnmower that cannot be repaired. The new lawnmower is expected to have a useful life of 6 years, with no salvage value at the end of that period.

Click here to view the factor table.

(a)

If Larry’s required rate of return is 11%, what level of annual cash savings must the lawnmower generate to be considered an acceptable investment under the net present value method? (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

Annual cash savings should be

$

(b)	If Larry’s required rate of return is 18%, what level of annual cash savings must the lawnmower generate to be considered an acceptable investment under the net present value method?

Answer 1

a.)	Cost of new lawnmower	$ 8,416
	Useful Life	6 Years
	Required rate of return	11%
	Annual Cash saving must be	$ 1,989	( 8,416 / 4.2303 )
	At Annual cash saving of $ 1,989 , net present value will be $ 0.
b.)	Cost of new lawnmower	$ 8,416
	Useful Life	6 Years
	Required rate of return	18%
	Annual Cash saving must be	$ 2,406	( 8,416 / 3.4976 )
	At Annual cash saving of $2,406 , net present value will be $ 0.