Jonathon Company is considering an investment in the project below:
$\begin{array}{ll}&\text { Project } 1\
\text { Cost } & \$ 10,000 \
\text { Annual cash operating savings (end of year) } & \$ 3,000 \
\text { Terminal salvage } & \$ 0 \
\text { Useful life in years } & 5 \
\text { Required rate of return } & 10 \% \
\text { Present value of one for } 5 \text { periods at } 10 \% & 0.6209
\end{array}$
Present value of ordinary annuity of one for
$\begin{array} { l }
\text {5 periods at 10\% }&3.7908 \
\end{array}$

Ignoring taxes,what is the lowest level of annual cash operating savings that will result in a positive net present value?
A) $2,420
B) $2,638
C) $3,000
D) $3,120

Question

Jonathon Company is considering an investment in the project below:
$\begin{array}{ll}&\text { Project } 1\
\text { Cost } & \$ 10,000 \
\text { Annual cash operating savings (end of year) } & \$ 3,000 \
\text { Terminal salvage } & \$ 0 \
\text { Useful life in years } & 5 \
\text { Required rate of return } & 10 \% \
\text { Present value of one for } 5 \text { periods at } 10 \% & 0.6209
\end{array}$
Present value of ordinary annuity of one for
$\begin{array} { l  }
 \text {5 periods at 10\% }&3.7908 \
\end{array}$

Ignoring taxes,what is the lowest level of annual cash operating savings that will result in a positive net present value?
A) $2,420
B) $2,638
C) $3,000
D) $3,120

Quizplus · Accepted Answer

To find the lowest level of annual cash operating savings that will result in a positive net present value (NPV), we use the present value of an ordinary annuity formula. The initial investment is $10,000, and we want the present value of the cash flows to be equal to or greater than this amount to achieve a positive NPV. The present value of an ordinary annuity factor for 5 periods at 10% is 3.7908. Therefore, we solve for the annual cash operating savings (C) as follows: $10,000 = C * 3.7908. Solving for C gives us approximately $2,638.

Jonathon Company Is Considering an Investment in the Project Below