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:
A)$133,385
B)$235,070
C)$185,000
D)$20,979

Question

Quizplus · Accepted Answer

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

PV = C x [(1 - (1 + r)^-n) / r]

Where PV is the present value, C is the annual cost savings, r is the discount rate (12%/year), and n is the number of years (5).

Plugging in the numbers, we get:

PV = $37,000 x [(1 - (1 + 0.12)^-5) / 0.12]
PV = $133,385.19 (rounded to the nearest dollar)

Therefore, the best choice is A, with a present value of the annual cost savings of $133,385.

Clairmont Corporation Is Considering the Purchase of a Machine That