DON Corp. is contemplating the purchase of a machine that will produce not after
ID: 2492446 • Letter: D
Question
DON Corp. is contemplating the purchase of a machine that will produce not after-tax cash savings of $22,000 per year for five years. At the end of five years, the machine can be sold to realize after-tax cash flows of $5,200. Interest is 12%. Assume the cash flows occur at the end of each year (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (use appropriate factor(s) from the tables provided.) Calculate the total present value of the cash savings. (Do not round intermediate calculations.)Explanation / Answer
DON Corp.
After Tax cost Savings from Machinery purchased = $22000 for Five Years
Resale value at the end of Five Years = $5200
Rate of Interest = 12%
Since cash flows are even through out the period,Present value of Cost savings can be arrived by multiplying Present value annuity with annual cost savings.
Present Value (PV) of Cost Savings
PV Annuity Factor(12%,5years) = 3.60477
a.PV of Cost Savings from machinery = $22000 * 3.60477 = $79305
b.PV of Residual Value of Machinery = Residual value * PVIF(12%,5th year)
= $5200 * 0.56742
= $2950.62.
Total PV of cost Savings(a+b) = $79305 + $2950 = $82255
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