Question

Swifty Corporation is considering the purchase of a new bottling machine. The machine would cost $220,266 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 $37,800. 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%.

(a)- Calculate the net present value.

(b)- How much would the reduction in downtime have to be worth in order for the project to be acceptable?

Answer 1

a)

Net present value = - $ 11049.8 - $ 11050

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b)

Suppose the net present worth of the project was positive, then to find out how much the reduction in downtime must be worth in order for the project to be acceptable, we have to divide the net present value by the annuity factor

Reduction in down time must be worth = $ 11050 PVIFAr=9%, n = 8 years

Reduction in down time must be worth = $ 11050 5.535

Reduction in down time must be worth = $ 1996.4