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 5-year useful life. The machine will cost $205,980 and has no salvage value. The machine has a 14% internal rate of return. (Ignore income taxes).
Required:
What are the annual cost savings promised by the machine?

Answer 1

Answer:

Annual cost savings = 60,000

Explanation:

Given:

Present value of machine = $205,980

Use full life = 5 year

Internal rate of return = 14% = 0.14

Find

Annual cost savings = ?

Computation:

Annuity factor

$\frac{1-(1+r)^{-n}}{r} \\\\\frac{1-(1+0.14)^{-5}}{0.14}\\\\\frac{1-(1.14)^{-5}}{0.14}\\\\3.433$

Annual cost savings = Present value of machine / Annuity factor

Annual cost savings = $205,980 / 3.433

Annual cost savings = 60,000