Muskoka Landscaping Ltd. is planning to buy equipment costing $25,000 to improve its services. The equipment is expected to save $8,000 in cash operating costs per year. Its estimated useful life is five years, and it will have zero terminal disposal price. The required rate of return is 12%.
REQUIRED
1. Compute (a) the net present value and (b) the internal rate of return.
2. What is the minimum annual cash savings that will make the equipment desirable on a net present value basis?
3. When might a manager calculate the minimum annual cash savings described in requirement 2 rather than use the $8,000 savings in cash operating costs per year to calculate the net present value or internal rate of return?