Fergus Company is considering the purchase of a machine that will save the company $4,000 per year in operating costs for a period of seven years.The most it should pay for the machine is equal to
A)$4,000 times the present value of an ordinary annuity for 7 periods.
B)$28,000.
C)$4,000 divided by the future value of a single sum at the end of 7 periods.
D)$4,000 times the future value of an ordinary annuity for 7 periods.

Question

Quizplus · Accepted Answer

The present value of an annuity formula is used to determine the value of a series of equal payments made at the end of each period. In this case, the cost savings of $4,000 per year for 7 years is effectively an annuity. Therefore, the most Fergus Company should pay for the machine is equal to $4,000 times the present value of an ordinary annuity for 7 periods. This formula takes into account the time value of money and provides a more accurate measure of the value of the machine to the company. Option B is incorrect as it does not take into account the time value of money. Option C is incorrect as it uses the future value formula instead of present value. Option D is incorrect as it uses the future value of an annuity formula instead of present value.

Fergus Company Is Considering the Purchase of a Machine That