The local school board is considering the purchase of a computer. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.
A) $25,714
B) $23,142
C) $24,776
D) $23,656

Question

Quizplus · Accepted Answer

To find the minimal annual cost saving required, calculate the present value of the cost savings using the annuity formula and equate it to the net cost of the computer. The net cost is the purchase price minus the present value of the salvage value. Solving for the annual savings gives approximately $24,776.

The Local School Board Is Considering the Purchase of a Computer