Question

HI Corporation is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its 7-year useful life. The machine will cost $213,980 and has no salvage value. The machine has a 14% internal rate of return. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using the tables provided.

What are the annual cost savings promised by the machine? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Annual Cost Savings:

Annual Cost Savings:

Required:

What are the annual cost savings promised by the machine? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

Present value of annuity(A)= $ 213,980

Assuming Annual Cost savings= R

Internal rate of return(I)= 14%=0.14

Number of years(N)= 7

As per the formula for Present value of an annuity,

A= R [ ((1 + I)^N) – 1]/

             I X (1+I)^N

So,   

213,980= R [ ((1.14^7)-1)/ (0.14 x (1.14^7))]

213,980= R x [ 1.5022/(0.14 x 2.5022)]

213,980= R x 4.2883

Therefore,

R= 213,980/ 4.2883= 49,898.56

Hence, Annual cost savings each year for 7years shall be $ 49,898.56

if any doubt please mention in comment