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Splish Brothers, Inc. is considering the purchase of a new machine for $680000 that has an...

Splish Brothers, Inc. is considering the purchase of a new machine for $680000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $119000. It is believed that the new machine will reduce downtime because of its reliability. Assume the discount rate is 8%. In order to make the project acceptable, the increase in cash flows per year resulting from reduced downtime must be at least

Year

Present Value
of 1 at 8%

PV of an Annuity
of 1 at 8%

1

.926      

.926      

2

.857      

1.783      

3

.794      

2.577      

4

.735      

3.312      

5

.681      

3.993      

$25913 per year.

$50966 per year.

$20791 per year.

$51298 per year.

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Answer #1
Minimum cashflow = Initial investment / PV of annuity,8%,Year 5 = 680000 / 3.993 170298
Minimum increase in cashflow = 170298 - 119000 51298 per year
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