(Ignore income taxes in this problem.) The management of Mashiah Corporation is considering the purchase of a machine that would cost $290,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $102,000 per year. The company requires a minimum pretax return of 13% on all investment projects.
-The present value of the annual cost savings of $102,000 is closest to:

Question

Quizplus · Accepted Answer

To find the present value of the annual cost savings, we need to use the formula:

Present Value = Annual Cost Savings / Discount Rate

We are not given a specific discount rate, so we cannot calculate the exact present value. However, we can use process of elimination to find the closest answer.

Option A: $849,012 
This answer seems too high, especially since the annual cost savings is only $102,000.

Option B: $612,000 
This answer also seems too high.

Option C: $195,872 
This answer seems too low, especially since the annual cost savings is $102,000.

Option D: $407,796 
This answer seems like the most reasonable choice.

Therefore, the best choice is D, and the explanation is based on the process of elimination.

(Ignore Income Taxes in This Problem