The local school board is considering the purchase of a new computer system. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.

Question

Quizplus · Accepted Answer

In order to determine the minimal annual cost saving required to justify the purchase, we need to calculate the present value of the cash outflows (the cost of the computer system and any other associated costs) and compare it to the present value of the cash inflows (the cost savings from using the new computer system).

Using a financial calculator or spreadsheet program, we can calculate that the present value of the cash outflows is $72,360.05, and the present value of the cash inflows is $97,136.11.

Subtracting the present value of the cash outflows from the present value of the cash inflows, we get a net present value of $24,776.06. This represents the minimum amount of annual cost savings needed to justify the purchase at a required rate of return of 14%.

Therefore, the correct choice is C, $24,776.

The Local School Board Is Considering the Purchase of a New