Allen Ltd invested in a machine that has a 3-year useful life. The company's discount rate is 12%, and the net present value of the investment is $(573). Annual cost savings are: year 1 $3,000; year 2 $4,000; and year 3 $5,000. Determine the original cost of the machine. Ignore income taxes.

Question

Quizplus · Accepted Answer

To determine the original cost of the machine, we need to use the formula for net present value (NPV):

NPV = -Initial cost + PV of annual cost savings

Where PV is the present value, or the current value of the cost savings, taking into account the time value of money.

Given that NPV = $(573), we can plug in the values for each year's cost savings and solve for the initial cost:

-573 = -C + (3000/(1+0.12)^1) + (4000/(1+0.12)^2) + (5000/(1+0.12)^3)

Simplifying this equation, we get:

C = $10,000

Therefore, the original cost of the machine was $10,000, and the best choice is C).

Allen Ltd Invested in a Machine That Has a 3-Year