What is the minimum annual cash flow they could accept in order to cover the costs of this machine?

Sorbent has developed a new machine to manufacture toilet paper, which they expect they can use for a period of 9 years. However, it will cost them $8.75 million. What is the minimum annual cash flow they could accept in order to cover the costs of this machine? Sorbent have determined that a discount rate of 5.5% p.a. compounded annually is appropriate for this project.

Expert Solution

The minimum cash flow should be such that the future cash flows is just equal to the initial cost

Using a financial calculator

PV = -8.75

FV = 0

N = 9

I/Y = 5.5

Cpt PMT, we get PMT = 1.2586

Hence, the minimum annual cashflow = $1.2586 million

jeff jeffy answered 2 years ago

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