Richman Co.purchased some equipment 3 years ago.The company's required rate of return is 12%, and the net present value of the project was $(900).Annual cost savings were: $10,000 for year 1; $8,000 for year 2; and $6,000 for year 3.The amount of the initial investment was $$\begin{array} { c c c }
\text { Year } & \begin{array} { c }
\text { Present Value } \
\text { of } 1 \text { at } 12 \%
\end{array} & \begin{array} { c }
\text { PV of an Annuity } \
\text { of } 1 \text { at } 12 \%
\end{array} \
1 & .893 & .893 \
2 & .797 & 1.690 \
3 & .712 & 2.402
\end{array}$$

Question

Richman Co.purchased some equipment 3 years ago.The company's required rate of return is 12%, and the net present value of the project was $(900).Annual cost savings were: $10,000 for year 1; $8,000 for year 2; and $6,000 for year 3.The amount of the initial investment was $$\begin{array} { c c c } 
\text { Year } & \begin{array} { c } 
\text { Present Value } \
\text { of } 1 \text { at } 12 \%
\end{array} & \begin{array} { c } 
\text { PV of an Annuity } \
\text { of } 1 \text { at } 12 \%
\end{array} \
1 & .893 & .893 \
2 & .797 & 1.690 \
3 & .712 & 2.402
\end{array}$$

Quizplus · Accepted Answer

The correct answer is A because the initial investment is the present value of the cost savings, which is $10,000 x .893 + $8,000 x .797 + $6,000 x .712 = $20,478.

Richman Co A)$20,478 B)$18,316

Richman Co A)$20,478
B)$18,316