Management of the Krausse Savings and Loan Association is in the process of evaluating the purchase of a new check sorting machine.The model under review will cost $70,000 and will require installation costs of $10,000.Similar machines have a ten-year life,and management has estimated that this sorter will have a residual value of $10,000 at the end of its life.Annual cost savings to be generated by the sorter will average $14,000 over the ten-year period.Management's minimum desired rate of return is 12 percent.
Present value multipliers:

a.Using before-tax information and the net present value method to evaluate this capital investment,determine whether the company should purchase the check sorting machine.Support your answer.
b.If management had decided on a minimum desired before-tax rate of return of 14 percent,should the check sorting machine be purchased? Show all computations to support your answer.

Question

Management of the Krausse Savings and Loan Association is in the process of evaluating the purchase of a new check sorting machine.The model under review will cost $70,000 and will require installation costs of $10,000.Similar machines have a ten-year life,and management has estimated that this sorter will have a residual value of $10,000 at the end of its life.Annual cost savings to be generated by the sorter will average $14,000 over the ten-year period.Management's minimum desired rate of return is 12 percent.
Present value multipliers:

a.Using before-tax information and the net present value method to evaluate this capital investment,determine whether the company should purchase the check sorting machine.Support your answer.
b.If management had decided on a minimum desired before-tax rate of return of 14 percent,should the check sorting machine be purchased? Show all computations to support your answer.

Quizplus · Accepted Answer

The Answer of Management of the Krausse Savings and Loan Association is in the process of evaluating the purchase of a new check sorting machine.The model under review will cost $70,000 and will require installation costs of $10,000.Similar machines have a ten-year life,and management has estimated that this sorter will have a residual value of $10,000 at the end of its life.Annual cost savings to be generated by the sorter will average $14,000 over the ten-year period.Management's minimum desired rate of return is 12 percent.
Present value multipliers:

a.Using before-tax information and the net present value method to evaluate this capital investment,determine whether the company should purchase the check sorting machine.Support your answer.
b.If management had decided on a minimum desired before-tax rate of return of 14 percent,should the check sorting machine be purchased? Show all computations to support your answer.

Management of the Krausse Savings and Loan Association Is in the Process