Chico Company is considering the purchase of a new high-speed machine for its factory. The machine will cost $160,000 and will save the company $45,000 per year in cash operating costs. The machine has an estimated useful life of five years and no expected salvage value. The company's cost of capital is 12%. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required:1) Compute the net present value of this investment. 2) What is the maximum amount that Chico should be willing to pay for the machine? 3) What are the minimum annual cash savings that will make the machine acceptable on a net present value basis if the purchase price is $160,000?
What will be an ideal response?
1) Net present value:
| Total present value = 45,000 × 3.604776 = | $ | 162,214.92 | |
| Less: Initial outlay | (160,000.00 | ) | |
| Net present value | $ | 2,214.92 |
2) To earn at least the minimum rate of return of 12%, the company should pay no more than $162,215.
3) Minimum annual savings:
Savings × 3.604776 = $160,000; Therefore, annual savings = $44,385.56
Business
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