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? $\begin{array}{c}

\begin{array}{lll}
\underline{\text { Present Value of Annuity of } 1}&
\
\underline{\text { Period }}&\underline{12 \%}\
5&3.605
\end{array}
\begin{array}{lll}
\underline{\text { Present Value of } 1}\
\underline{\text { Period }}&\underline{12 \%}\
5&.567
\end{array}
\end{array}$

Question

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? $\begin{array}{c}

\begin{array}{lll}
\underline{\text { Present Value of Annuity of } 1}&
\
\underline{\text { Period }}&\underline{12 \%}\
5&3.605
\end{array}
\begin{array}{lll}
\underline{\text { Present Value  of } 1}\
\underline{\text { Period }}&\underline{12 \%}\
5&.567
\end{array}
\end{array}$

Quizplus · Accepted Answer

To calculate the maximum amount Tammy would be willing to pay for the machine, we need to find its present value. We can use the formula: PV = Annual savings x (1 - 1/(1+r)^n) / r, where PV is the present value, r is the rate of return, and n is the number of years. Substituting the given values, we get PV = 22000 x (1 - 1/(1+0.12)^5) / 0.12 = $79,310. Therefore, the maximum Tammy would be willing to pay for this machine is $79,310, which is option B.

Tammy CoIs Considering Purchasing a Machine That Will Produce Annual Savings