Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: Cost of new machine $100,000
Annual cost savings in cash expenses 45,000
Terminal value 8,000
Maintenance required in the 4th year 5,000
Book value of the old machine 20,000
The new machine would replace an old fully-amortized machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for amortization on all machines (ignore the half-year convention). Note: some amounts are rounded.
The present value of the maintenance cost in year 4 is:

Question

Quizplus · Accepted Answer

To calculate the present value of the maintenance cost in year 4, we need to use the formula:
PV of maintenance cost = Maintenance cost / (1 + discount rate)^n
where n is the number of years from present.

In this case, the maintenance cost is $5,000, and n is 4. So, plugging in the numbers, we get:
PV of maintenance cost = 5,000 / (1 + 0.12)^4
PV of maintenance cost = $3,180 (rounded to nearest dollar)

Therefore, the answer is B, $3,180.

Arnold Company Is Acquiring a New Machine with a Life