Butler Company Butler Company is considering an investment in a machine that would reduce annual labor costs by $30,000.The machine has an expected life of 10 years with no salvage value.The machine would be depreciated according to the straight-line method over its useful life.The company's marginal tax rate is 30 percent.
Refer to Butler Company.Assume that the company will invest in the machine if it generates an internal rate of return of 16 percent.What is the maximum amount the company can pay for the machine and still meet the internal rate of return criterion? Present value tables or a financial calculator are required.

Question

Quizplus · Accepted Answer

The maximum amount Butler Company can pay for the machine is the present value of the after-tax savings from the machine. The annual after-tax savings are $30,000 * (1 - 0.30) = $21,000. Using the present value of an annuity formula for 10 years at a 16% discount rate, the present value factor is approximately 4.833. Thus, the maximum price is $21,000 * 4.833 = $101,493, which is closest to option A.

Butler Company Butler Company Is Considering an Investment in a Machine