Richman Co.purchased some equipment 3 years ago.The company's required rate of return is 12% and the net present value of the project was $(900).Annual cost savings were: $10000 for year 1; $8000 for year 2; and $6000 for year 3.The amount of the initial investment was $\begin{array} { c c c }
\underline{\text { Year } }& \begin{array} { c }
\text { Present Value } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} & \begin{array} { c }
\text { PV of an Annuity } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} \
1& .893 &.893 \
3 & .797 & 1.690 \
3 & .712 & 2.402
\end{array}$

Question

Richman Co.purchased some equipment 3 years ago.The company's required rate of return is 12% and the net present value of the project was $(900).Annual cost savings were: $10000 for year 1; $8000 for year 2; and $6000 for year 3.The amount of the initial investment was $\begin{array} { c c c } 
\underline{\text { Year } }& \begin{array} { c } 
\text { Present Value } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} & \begin{array} { c } 
\text { PV of an Annuity } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} \
1& .893 &.893 \
 3 & .797 & 1.690 \
3 & .712 & 2.402
\end{array}$

Quizplus · Accepted Answer

The correct answer is A because the initial investment is the present value of the cost savings, which is $10,000 x 0.893 + $8,000 x 0.797 + $6,000 x 0.712 = $20,478.

Richman Co A)$20478 B)$18316

Richman Co A)$20478
B)$18316