The management of Opray Corporation is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% on all investment projects. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The present value of the annual cost savings of $78,000 is closest to:
A) $763,064
B) $177,027
C) $546,000
D) $367,536

Question

Quizplus · Accepted Answer

The present value of the annual cost savings can be calculated using the Present Value of an Annuity table. Given the annual cost savings of $78,000, a discount rate of 11%, and a period of 7 years, we look up the factor for 11% and 7 years. The factor is 4.712. Multiplying $78,000 by 4.712 gives us $367,536, which is closest to option D.

The Management of Opray Corporation Is Considering the Purchase of a Machine