Question

Michener Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $170,000 and has an estimated useful life of eight years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $31,000. Management also believes that the new 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 10%. 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 e.g. -45 or parentheses e.g. (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided, e.g. 1.25124. Round present value answer to 0 decimal places, e.g. 1,250.)

Net present value

$

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

Present value of reduction in downtime

$

Answer 1

Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.10^a	d=b*c
0	$                 -170,000	1	$       -170,000.00
1	$                     31,000	0.90909	$           28,181.79
2	$                     31,000	0.82645	$           25,619.95
3	$                     31,000	0.75131	$           23,290.61
4	$                     31,000	0.68301	$           21,173.31
5	$                     31,000	0.62092	$           19,248.52
6	$                     31,000	0.56447	$           17,498.57
7	$                     31,000	0.51316	$           15,907.96
8	$                     31,000	0.46651	$           14,461.81
	Net present value	6.33492	$                 -4,617
Present value reduction in down time should be $4617
so that NPV is positive.