Royal Pacific Corporation Royal Pacific Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years.At the end of 10 years,the ship will have no value and will be scuttled.Royal Pacific's cost of capital is 12 percent,and its marginal tax rate is 40 percent.
Refer to Royal Pacific Corporation.If the ship produces equal annual labor cost savings over its 10-year life,how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar.)Present value tables or a financial calculator are required.

Question

Quizplus · Accepted Answer

To calculate the annual savings needed to generate a net present value of $0, we need to use the formula:

Annual savings = Cost of ship / PVIFA (r,n) - Salvage value

PVIFA stands for present value interest factor of an annuity and can be found in a present value table or using a financial calculator.

Using the information given in the problem, we can plug in the numbers and solve for the annual savings:

Annual savings = $500,000 / PVIFA (12%, 10) - $0
Annual savings = $500,000 / 6.352 - $0
Annual savings = $78,610 - $0
Annual savings = $78,610

Therefore, the annual savings in labor costs need to be $78,610 to generate a net present value of $0.

The closest answer choice to this amount is C) $88,492, which is the best choice.

Royal Pacific Corporation Royal Pacific Corporation Is Considering the Purchase