Benaflek 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 $(1800).Annual cost savings were: $20000 for year 1; $16000 for year 2; and $12000 for year 3.The amount of the initial investment was $\begin{array} { c c c }
\underline{\text { Year }} & \begin{array} { c }
\text { Present Value } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} & \begin{array} { c }
\text { PV of an Annuity } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} \
1 & .893 & .893 \
2 & .797 & 1.690 \
3 & .712 & 2.402
\end{array}$

Question

Benaflek 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 $(1800).Annual cost savings were: $20000 for year 1; $16000 for year 2; and $12000 for year 3.The amount of the initial investment was $\begin{array} { c c c } 
\underline{\text { Year }} & \begin{array} { c } 
\text { Present Value } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} & \begin{array} { c } 
\text { PV of an Annuity } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} \
 1 & .893 & .893 \
2 & .797 & 1.690 \
3 & .712 & 2.402
\end{array}$

Quizplus · Accepted Answer

The correct answer is A because the initial investment is the present value of the annual cost savings discounted at the required rate of return. The present value of the annual cost savings is:$20,000 x 0.893 + $16,000 x 0.797 + $12,000 x 0.712 = $40,956

Benaflek Co A)$40956 B)$36632

Benaflek Co A)$40956
B)$36632