The management of Mashiah Corporation is considering the purchase of a machine that would cost $290,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $102,000 per year. The company requires a minimum pretax return of 13% on all investment projects. The present value of the annual cost savings of $102,000 is closest to:
A)$849,012
B)$612,000
C)$195,872
D)$407,796

Question

Quizplus · Accepted Answer

The present value of the annual cost savings can be calculated using the formula for the present value of an annuity. Using a 13% discount rate for 6 years, the present value factor is approximately 3.998. Multiplying this factor by the annual savings of $102,000 gives a present value of approximately $407,796.

The Management of Mashiah Corporation Is Considering the Purchase of a Machine