Question

In an effort to reduce costs, Pontic Manufacturing Corporation is considering an investment in equipment that will reduce defects This equipment will cost $420,000, will have an estimated useful life of 10 years, and will have an estimated salvage value of $50,000 at the end of 10 years. The company's discount rate is 22%. what amount of cost savings will this equipment have to generate per year in each of the 10 years in order for it to be an acceptable project? (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice a. $50,690 or more b. 105,315 or more c. $94,316 or more d. $41,315 or more

Answer 1

Answer:

b. 105,315 or more

Explanation:

We have to discount the present value ofthe salvage value

and then solve for the PTM at 22% which is the firm cost of capital

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $50,000.0000

time  10.00

rate  0.22000

$\frac{50000}{(1 + 0.22)^{10} } = PV$  

PV   6,844.9723

420,000 - 6,844.9723 = $413,155.0277

$PV \div \frac{1-(1+r)^{-time} }{rate} = C$

PV $413,155.0277

time 10

rate 0.22

$413155.027658973 \div \frac{1-(1+0.22)^{-10} }{0.22} = C$

C  $ 105,311.143

Cost saving in the order of 105,311 dolalr per year will fullfil the company required return on investment.

Answer 2

105,315 $ or more

The value is predicated on an estimate of the asset's value, or the worth is often determined by a regulatory body, like the U.S. tax revenue Service (IRS).

What is Salvage value?

The salvage value is employed to see annual depreciation within the accounting records, and therefore the salvage value is employed to calculate depreciation expense on the legal instrument. the worth is predicated on an estimate of the asset's value, or the worth is determined by a regulatory body, like the U.S. tax income Service ( IRS ).

Calculation of Salvage Value

We have to discount this value oft he salvage value

and then solve for the PTM at 22% which is that the firm cost of capital

Maturity/(1+rate)time is = PV

Maturity $50,000.0000

time 10.00

rate 0.22000

50000/(1+0.22)10 is = PV

PV 6,844.9723

420,000 - 6,844.9723 = $413,155.0277

PV ÷ 1-(1+r)-time/rate is = C

PV $413,155.0277

time 10

rate 0.22

413155.027658973 ÷ 1-(1+0.22)-10/0.22 is = C

C $ 105,311.143

Cost-saving within the order of 105,311 $ p.a. will full fill the corporate required return on investment.

Thus, the proper option is "B".

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