Use the information below to answer the following question(s).
Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:
Note: Other than the initial investment, cash flows are end of period.
-Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $150,000. The annual cost savings if the new machine is acquired will be $40,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be $20,000. Upper Darby Park Department is assuming no tax consequences. If Upper Darby Park Department has a required rate of return of 10%, which of the following is closest to the present value of the project?
A) $1,632
B) $12,418
C) $14,050
D) $150,000
E) $70,000

Question

Use the information below to answer the following question(s).
Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:
  Note: Other than the initial investment, cash flows are end of period.
-Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $150,000. The annual cost savings if the new machine is acquired will be $40,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be $20,000. Upper Darby Park Department is assuming no tax consequences. If Upper Darby Park Department has a required rate of return of 10%, which of the following is closest to the present value of the project?
A) $1,632 
B) $12,418 
C) $14,050 
D) $150,000 
E) $70,000

Quizplus · Accepted Answer

The present value of the project is calculated by discounting the annual savings and the terminal value at the required rate of return. The present value of the savings is $40,000 * (PVIFA 10%, 5 years) + $20,000 * (PVIF 10%, 5 years) - $150,000. This calculation results in a value closest to $14,050.

Use the Information Below to Answer the Following Question(s)