Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}
\text { Cost of new machine } & \$ 100000 \
\text { Annual cost savings in cash expenses } & 45000 \
\text { Terminal value } & 8000 \
\text { Maintenance required in the 4th year } & 5000 \
\text { Book value of the old machine } & 20000
\end{array}$ The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the maintenance cost in year 4 is:
A) $420
B) $2,226
C) $3,180
D) $954

Question

Quizplus · Accepted Answer

The Answer of Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}
\text { Cost of new machine } & \$ 100000 \
\text { Annual cost savings in cash expenses } & 45000 \
\text { Terminal value } & 8000 \
\text { Maintenance required in the 4th year } & 5000 \
\text { Book value of the old machine } & 20000
\end{array}$ The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the maintenance cost in year 4 is:
A) $420
B) $2,226
C) $3,180
D) $954

Bruno Is Acquiring a New Machine with a Life of 5