Valesano Company is considering a project with the following information: Projec

Question

Valesano Company is considering a project with the following information:

                                                                                                               Project 1

Cost                                                                                                          $4,000

Annual cash operating savings(end of year)                              $2,000

Terminal salvage                                                                                         $0

Useful life in years                                                                                         3

Required rate of return                                                                            10%

Present value of one for 3 periods at 10%                                     0.7513

Present value of ordinary annuity of one for

3 periods at 10%                                                                                   2.4869

Ignoring taxes, what is the lowest level of annual cash operating savings that will result in a positive net present value? SHOW WORK

Explanation / Answer

Solution:

Cost of project 4,000 PVAF @ 10% 2.4869 Let the annual cash operating savins be $ x For a Positive NPV , Present value of cashflow = Cost of project Thus, 2.4869x = 4,000 x = 4,000 / 2.4869         1,608.43 Lowest level of annual cash x = $ 1608.43

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