Question

Toronto Shakespearean Theater’s board of directors is considering the replacement of the theater’s lighting system. The old system requires two people to operate it, but the new system would require only a single operator. The new lighting system will cost $140,450 and save the theater $29,000 annually for the next eight years.

  

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

1-a.	Prepare a table showing the proposed lighting system’s net present value for each of the following discount rates: 8 percent, 10 percent, 12 percent, 14 percent, and 16 percent. (Round "Annuity Discount Factor" to 3 decimal places. Negative amounts of "Net Present Value" should be indicated by a minus sign.)
	Discount Rate Annuity Discount Factor Annual Savings Present Value of Annual Savings Acquisition Cost Net Present Value 8% 10% 12% 14% 16%

1-b.	Based on your findings in requirement 1-a., which of the following statements is true?
	The net present value does not change as the discount rate increases. The net present value increases as the discount rate increases. The net present value declines as the discount rate increases.

Answer 1

Solution 1a:

7 Toronto Shakespearean theater 9 Discount Rate Annual Savings Acquisition Cost Net Present Value 10 8% 10% 12% 14% 16% Annuity Discount Factor 5.747 5.335 4.968 4.639 4.344 29000 29000 29000 29000 29000 Present Value of Annual Savings 166663 154715 144072 134531 125976 140450 140450 140450 140450 140450 26213 14265 3622 -5919 -14474 24 25 30 31 32 33 34 35 38 40 41 42 48 49 50 eet64 ) Sheet65 ) Sheet227 ) Sheet228 Sheet256

Solution 1b:

The net present value declines as the discount rate increases. This statement is true.