Tammy Co.is considering purchasing a machine that will produce annual savings of $22,000 at the end of the year.Tammy requires a 12% rate of return and the asset has a 5-year useful life.What is the maximum Tammy would be willing to pay for this machine?

Question

Quizplus · Accepted Answer

Using the formula for present value of an annuity:

PV = (Annual Savings / Discount Rate) * [1 - (1 / (1 + Discount Rate)^n)]

PV = (22,000 / 0.12) * [1 - (1 / (1 + 0.12)^5)]

PV = $79,310 (rounded to nearest dollar)

Therefore, the maximum Tammy would be willing to pay for this machine is $79,310. Option B is the correct choice.

Tammy CoIs Considering Purchasing a Machine That Will Produce Annual Savings