Almendarez Corporation is considering the purchase of a machine that would cost $320,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $51,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $72,000. The company requires a minimum pretax return of 18% 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 $72,000 is closest to:
A) $22,608
B) $874,298
C) $504,000
D) $274,464

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of the cost savings using the discount factor from Exhibit 14B-1 for 7 years and 18%:
PV = $72,000 x 3.433 = $247,176

Next, we need to calculate the present value of the salvage value using the discount factor from Exhibit 14B-2 for 7 years and 18%:
PV = $51,000 x 0.386 = $19,686

Finally, we can calculate the net present value (NPV) of the project:
NPV = PV(cost savings) - PV(machine cost) + PV(salvage value)
NPV = $247,176 - $320,000 + $19,686
NPV = -$53,138

Since the NPV is negative, this project should be rejected as it does not meet the company's minimum pretax return requirement. Therefore, the best choice is D only.

Almendarez Corporation Is Considering the Purchase of a Machine That