Exercise D9-9 Larry\'s Lawn Service needs to purchase a new lawnmower costing $7

Question

Exercise D9-9 Larry's Lawn Service needs to purchase a new lawnmower costing $7,756 to replace an old lawnmower that cannot be repaired. The new lawnmower is expected to have a useful life of 4 years, with no salvage value at the end of that period. Click here to view the factor table. (a) If Larry's required rate of return is 11%, what level of annual cash savings must the lawnmower generate to be considered an acceptable investment under the net present value method? (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to O decimal place, e.g.58,971.) Annual cash savings should be g b what level of annual cash savings must he la n o er generate to be considered an acceptable f Larry's required rate of return is 14% present value method? (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to O decimal place, e.g. 58,971.) vestment un er en t Annual cash savings should be

Explanation / Answer

Net present value = present value of cashinflows-present value of cash outflows A Present value of cash outflows $7,756 To accept the replacement minimum present value of cashinflows should be equal to present value of outflows Present value of cashinflows = Annual savings* annuity factor Annuity factor at 11% for 4 years (from annuity table) 3.10245 Annual cash savings sould be = $7,756/3.10245 $2,500 Ans Annual savings should be $2,500 B Present value of cashinflows = Annual savings* annuity factor Annuity factor at 14% for 4 years (from annuity table) 2.9137 Annual cash savings sould be = $7,756/2.9137 $2,662 Ans Annual savings should be $2,662

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