Question

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase:



The new machine would replace an old fully-amortized machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for amortization on all machines (ignore the half-year convention). Note: some amounts are rounded.

What is the present value of the annual cost savings (after taxes, excluding year 4 maintenance)? Round to the nearest dollar.

Answer 1

Arnold Company Statement showing present value of annual cost saving (excluding maintenance cost) Year 1 Year 2 Year 3 Year 4 Year 5 Annual Cost Saving $ 45,000.00 $ 45,000.00 $ 45,000.00 $ 45,000.00 $ 45,000.00 Tax @ 30% $ 13,500.00 $ 13,500.00 $ 13,500.00 $ 13,500.00 $ 13,500.00 Annual Cost Saving after Tax $ 31,500.00 $ 31,500.00 $ 31,500.00 $ 31,500.00 $ 31,500.00 P.V. Factor @ 12% for n years $ 0.89 $ 0.80 $ 0.71 $ 0.64 $ 0.57 Present value of Annual Cost Saving $ 28,125.00 $ 25,111.61 $ 22,421.08 $ 20,018.82 $ 17,873.95 Present Value of Total Annual Saving $ 113,550