Question

Assume that a company is considering purchasing a machine for $100,000 that will have a seven-year useful life and a $14,000 salvage value. The machine will lower operating costs by $18,000 per year and increase sales volume by 1,000 units per year. The company earns a contribution margin of $3.00 per unit. The company also expects this investment to provide qualitative benefits that it is struggling to incorporate into its financial analysis. Assuming the company’s required rate of return is 17%, the minimum dollar value per year that must be provided by the machine’s qualitative benefits to justify the $100,000 investment is closest to: Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice $4,409. $3,309. $3,619. $4,339.

Answer 1

Savings in operating costs	18000
Add: Contribution margin	3000	=1000*3
Annual cash flows	21000
Annual cash flows	21000
X PV factor	3.922	=(1-(1.17)^-7)/0.17
Present value of Annual cash flows	82362
Salvage value	14000
X PV factor	0.333	=1/1.17^7
Present value of salvage value	4662
Total present value	87024	=82362+4662
Less: Investment cost	100000
Net present value	-12976
Negative Net present value	12976
Divide by PV factor	3.922
Minimum dollar value per year	3309
$3,309 is correct option