Fabian Company is considering the purchase of a machine that will save the company $4,000 per year in operating costs for a period of 10 years.The most it should pay for the machine is equal to
A) $4,000 times the present value of an ordinary annuity for 10 periods.
B) $40,000.
C) $4,000 divided by the future value of a single sum at the end of 10 periods.
D) $4,000 times the future value of an ordinary annuity for 10 periods.

Question

Quizplus · Accepted Answer

The present value of the savings generated by the machine over 10 years can be calculated as the present value of an ordinary annuity.
PV = PMT x [(1 - (1 + r)^-n)/r], where PV is the present value, PMT is the annual savings of $4,000, r is the discount rate, and n is the number of periods, which is 10 years.

Assuming a discount rate of 10%, we can calculate the present value as follows:
PV = $4,000 x [(1 - (1 + 0.10)^-10)/0.10]
PV = $31,446.70

Therefore, the most Fabian Company should pay for the machine is $31,446.70. Option A is the correct choice as it states that the most Fabian Company should pay is $4,000 times the present value of an ordinary annuity for 10 periods.

Fabian Company Is Considering the Purchase of a Machine That