Question

(19) A company is considering the purchase of a new machine that will increase operating efficiency and thus save $2,000 each year in labor costs. It is estimated that the machine will be used for ten years and it can then be sold for $1,000. If money is worth 6%, how much can the company afford to pay for this machine?

Answer 1

Since there is annual saving in the labor cost, the company can pay an amount equal to the present value of labor cost saving and also the present value of salvage value at the year end of 10.

Workings are as follows:

Year	Savings in labour cost	PV factor @6%	Discounted Savings
1	2000	0.943	1887
2	2000	0.890	1780
3	2000	0.840	1679
4	2000	0.792	1584
5	2000	0.747	1495
6	2000	0.705	1410
7	2000	0.665	1330
8	2000	0.627	1255
9	2000	0.592	1184
10	2000	0.558	1117
10	1000	0.558	558
			15279

Hence the amount that can be paid by the company to purchase a machine is $15,280(Rounded off to nearest $)