Question

Kingbird, Inc. is considering the purchase of a new machine for $650000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $113750. It is believed that the new machine will reduce downtime because of its reliability. Assume the discount rate is 8%. In order to make the project acceptable, the increase in cash flows per year resulting from reduced downtime must be at least Year Present Value of 1 at 8% PV of an Annuity of 1 at 8% 1 .926 .926 2 .857 1.783 3 .794 2.577 4 .735 3.312 5 .681 3.993 $48718 per year. $49035 per year. $24770 per year. $19874 per year.

Answer 1

Solution:

Computation of NPV - Kingbird Inc. (Without considering downtime)
Particulars	Period	Amount	PV factor at 8%	Present Value
Cash outflows:
Initial investment	0	$650,000.00	1	$650,000
Present Value of Cash outflows (A)				$650,000
Cash Inflows
Annual cash inflows	1-5	$113,750.00	3.9930	$454,204
Present Value of Cash Inflows (B)				$454,204
Net Present Value (NPV) (B-A)				-$195,796

In order to make the project acceptable, the increase in cash flows per year resulting from reduced downtime must be at least = $195,796 / Cumulative PV factor at 8% for 5 periods = $195,796 / 3.993 = $49,035 per year