Refer to the data given in the preceding exercise. Suppose the Toronto Shakespearean Theater’s board is uncertain about the cost savings with the new lighting system.
(Toronto 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.)
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.