(Ignore income taxes in this problem.) Clairmont Corporation is considering the purchase of a machine that would cost $150,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $37,000. The company requires a minimum pretax return of 12% on all investment projects.
-The present value of the annual cost savings of $37,000 is closest to:

Question

Quizplus · Accepted Answer

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

PV = CF / r

where PV is the present value, CF is the annual cash flow, and r is the discount rate. In this case, CF = $37,000 and r = 0.08 (8% as given in the question).

Using the formula, we get:

PV = $37,000 / 0.08 = $462,500

Therefore, the closest value to $462,500 among the given options is $133,385 (option A).

(Ignore Income Taxes in This Problem