Fabian Company is considering the purchase of a machine that will save the company $2,000 per year in operating costs for a period of seven years. The most it should pay for the machine is equal to
A) $2,000 times the present value of an ordinary annuity for 7 periods.
B) $14,000.
C) $2,000 divided by the future value of a single sum at the end of 7 periods.
D) $2,000 times the future value of an ordinary annuity for 7 periods.

Question

Quizplus · Accepted Answer

The cost of the machine should be equal to the present value of the savings it generates over the seven-year period. This can be calculated as the annual savings of $2,000 multiplied by the present value of an ordinary annuity for seven periods. Therefore, the most Fabian Company should pay for the machine is $2,000 times the present value of an ordinary annuity for 7 periods, which is answer choice A.

Fabian Company Is Considering the Purchase of a Machine That