Keane Bottling Corporation is considering the purchase of a new bottling machine

Question

Keane Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $187,128 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 $35,100. 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. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Assume a discount rate of 11%. (Hint: Calculate the net present value. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places.)

Explanation / Answer

Plug into financial calculator: Payment = -36,000 Future value = 0 Number of periods = 8 Rate = 11% Solve for present value and get 185,260.42 net present value = 185,260.42 - 191,140 = -5880 rounded Answer: Since the new present value is -5880, the reduction in downtime would have to be worth 5880. Alternatively, You could also find the present value factor on the calculator and round to 5 decimal places. To find the factor using the calcuator: Payment= -1 Future value = 0 Number of periods = 8 rate = 11% Solve for present value and get 5.14612 5.14612*36000 = 185260 185260 - 191140 = -5880, same answer.

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