Question

Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $180,010 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 $34,000. 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 129. Click here to view Py table Calculate the net present value. (If the net present value is negative, use either a negative sign preceding the number eg -15 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to decimal places, eg. 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 o decimal places, e.. 125.)

Answer 1

Answer:

1.Computation of NPV - Investment in New Project
Particulars	Period	PV Factor@12%	Amount($)	Present Value($)
Cash outflows:
Cost of VAN	0	1	1,80,010	1,80,010
Present Value of Cash outflows (A)				1,80,010
Cash Inflows
Annual increase in Cash Inflows:
Year 1	1	0.893	34,000	30,357
Year 2	2	0.797	34,000	27,105
Year 3	3	0.712	34,000	24,201
Year 4	4	0.636	34,000	21,608
Year 5	5	0.567	34,000	19,293
Year 6	6	0.507	34,000	17,225
Year 7	7	0.452	34,000	15,380
Year 8	8	0.404	34,000	13,732
Salvage Value	8	0.404	-	-
Present Value of Cash Inflows (B)				1,68,900
Net Present Value (NPV) (B-A)				-11,110
2) saving of $11,110, due to reduction in downtime will be worth in order for the project to be acceptable