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 3 years and cost only $4,000 annually to run? The opportunity cost of capital is 12%.
A) $2,000
B) $9,607
C) $14,411
D)$24,018

Question

Quizplus · Accepted Answer

The maximum amount to pay for the new machine is the present value of the cost savings over 3 years. The annual savings is $6,000 ($10,000 - $4,000). The present value of these savings is calculated using the formula for the present value of an annuity: PV = C * [(1 - (1 + r)^-n) / r], where C is the annual savings, r is the opportunity cost of capital, and n is the number of years. Plugging in the values: PV = $6,000 * [(1 - (1 + 0.12)^-3) / 0.12] = $14,411.

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