A currently used machine costs $10,000 annually to run.What is the maximum that should be paid to replace the machine with one that will last three years and cost only $4,000 annually to run? The opportunity cost of capital is 12 percent.
A)$2,000
B)$9,607
C)$14,411
D)$24,018 NPV = 6,000

Question

Quizplus · Accepted Answer

The maximum amount to pay for the new machine is the present value of the cost savings over three years. The annual savings is $6,000 ($10,000 - $4,000). The present value of these savings, discounted at 12%, is $14,411.

A Currently Used Machine Costs $10,000 Annually to Run