Question

The Cook County Authority is considering the purchase of a small plane to transport government officials. It is hoped that the plane will save money on travel costs for government employees. Assume the county requires a 8 percent rate of return. Using the present value tables in Exhibits 26-3 and 26-4, If the plane’s cost is $306,840 and it can likely be sold in six years for $100,000, what minimum annual savings in transportation costs is needed in order to make the plane a good investment? (Round Present value factor to 3 decimal places and your final answer to nearest whole dollar)

Answer 1

Answer:

$52,745

Explanation:

The computation of annual saving in transportation cost is shown below:-

Cost of plane = Annual saving in transportation cost x PVAF (i%, n) + Residual value × PVF (i%, n)

306,840 = Annual saving in transportation cost × PVAF (8%, 6) + 100,000 (8%,6)

306,840 = Annual saving in transportation cost × 4.623 + 100,000 × 0.630

306,840 = Annual saving in transportation cost × 4.623 + 63,000

Annual saving in transportation cost = $306,840 - $63,000

= 243,840 ÷ 4.623

= $52,745

Therefore for computing the annual saving in transportation cost we simply applied the above formula.