Question

Refer to the data given in the preceding exercise. Suppose the Vancouver Shakespearean Theater's board is uncertain about the cost savings with the new lighting system.
In the preceding exercise
Vancouver 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 $129,750 and save the theater $27,000 annually for the next eight years.
Required:
How low could the new lighting system's annual savings be and still justify acceptance of the proposal by the board of directors? Assume the theater's hurdle rate is 12 percent.

Answer 1

If the discounted cash inflows are equal to the sum of discounted cash outflows, then the Net present value will be zero. But still, the project can be accepted.

When the project's net present value is zero, the company denotes the minor savings.

$ 129,750 is the cost to the company?

(4.968 × annual savings )-($ 129,750)=0

Let the annual savings by ' x '

(4.968 × x) =$ 129,750 

x =$ 129,750/4.968 

x =$ 26,117