Chapter 14, Problem 25P

To determine

Concept Introduction:

Annual cost savings:

Annual cost savings can be defined as the cost saving earned during the year, if an old equipment or machinery is replaced by another. This is calculated to know whether the replacement is beneficial or not.

Net present value: The net present value is calculated as under −

$Netpresentvalue=Totalpresentvalueofcashinflows-InitialInvestment$

Initial investment can be defined as the cash outlay incurred at the beginning of the product and total present value of cash inflows is computed as under (in case of even cash inflows) −

$\begin{array}{l}Totalpresentvalueofcashinflows=Annualnetcashinflows\\ XPresentvalueofAnnuity\left(PVAF\right)atagivenrateforagivennumberofyears\end{array}$

This is how we calculate net present value of an investment.

Requirement 1:

To compute:

The net present value of cash flows associated with the purchase of cars.

To determine

Requirement 2:

To compute:

The net present value of cash flows associated with the lease alternative.

To determine

Requirement 3:

The alternative should the company accept − purchase of cars or lease alternative.