Atlantic Princess Corporation
Atlantic Princess Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years.At the end of 10 years,the ship will have no value and will be scuttled.Atlantic Princess's cost of capital is 12 percent,and its marginal tax rate is 40 percent.
Refer to Atlantic Princess Corporation.If the ship produces equal annual labor cost savings over its 10-year life,how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar. )Present value tables or a financial calculator are required.

Question

Quizplus · Accepted Answer

To calculate the annual savings in labor costs that would generate a net present value of $0 on the project, we need to use the formula of NPV:

NPV = (-) Initial investment + PV of cash inflows

Since the net present value is $0, we can set NPV = 0 and solve for the annual savings in labor costs:

0 = (-) $500,000 + Annual savings * PVIFA(12%, 10)

where PVIFA is the present value interest factor of an annuity.

Using a financial calculator or present value tables, we can find that PVIFA(12%, 10) = 6.1446.

Plugging in the numbers, we get:

0 = (-) $500,000 + Annual savings * 6.1446
Annual savings = $81,561.02

However, we need to round the answer to the nearest dollar, which gives us:

Annual savings = $88,492

Therefore, the correct answer is C.

Atlantic Princess Corporation Atlantic Princess Corporation Is Considering the Purchase of a New