Fabco, Inc., is considering purchasing flow valves that will reduce annual operating costs by $10,000 per...

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Fabco, Inc., is considering purchasing flow valves that will reduce annual operating costs by $10,000 per year for the next 1

business economics

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Answer 1

Answer #1

The company wants to invest in the valve which will save $10000 per year for the next 12 years.
We will need to calculate the PV of this cash flow.

PV = Cash Flow / (1+Interest Rate)^Duration

=PV(7%,12,-10000)
= 79426.86

The NPV of the cash flow will zero if company makes initial investment of this much amount at 7% interest rate.
The maximum amount the company would pay is $79426.86

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Answer 2

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