Tammy Co.is considering purchasing a machine that will produce annual savings of $22,000 at the end of the year.Tammy requires a 12% rate of return and the asset has a 5-year useful life.What is the maximum Tammy would be willing to pay for this machine?

Question

Quizplus · Accepted Answer

To calculate the maximum Tammy would be willing to pay for the machine, we need to find the present value of the annual savings using a discount rate of 12%. We can use the formula for present value of an annuity:

PV = A x [1 - (1 + r)-n] / r

where PV is the present value, A is the annual savings, r is the discount rate, and n is the number of years.

Plugging in the values, we get:

PV = $22,000 x [1 - (1 + 0.12)-5] / 0.12
PV = $79,310

Therefore, the maximum Tammy would be willing to pay for the machine is $79,310. The correct answer is B.

Tammy CoIs Considering Purchasing a Machine That Will Produce Annual Savings