{"id":33906,"date":"2025-06-23T12:09:19","date_gmt":"2025-06-23T12:09:19","guid":{"rendered":"https:\/\/gaviki.com\/blog\/?p=33906"},"modified":"2025-06-23T12:09:20","modified_gmt":"2025-06-23T12:09:20","slug":"almendarez-corporation-is-considering-the-purchase-of-a-machine-that-would-cost-130000andwouldlastfor6years","status":"publish","type":"post","link":"https:\/\/gaviki.com\/blog\/almendarez-corporation-is-considering-the-purchase-of-a-machine-that-would-cost-130000andwouldlastfor6years\/","title":{"rendered":"Almendarez Corporation is considering the purchase of a machine that would cost\u00a0130,000andwouldlastfor6years"},"content":{"rendered":"\n
Almendarez Corporation is considering the purchase of a machine that would cost 130,000andwouldlastfor6years.Attheendof6years,themachinewouldhaveasalvagevalueof18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $44,000. The company requires a minimum pretax return of 19% on all investment projects. (Ignore income taxes.)<\/pre>\n\n\n\n
The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n
To determine whether Almendarez Corporation should purchase the machine, we need to evaluate the investment using the payback period<\/strong> and net present value (NPV)<\/strong> approach, particularly focusing on the NPV since the company requires a minimum pretax return of 19 percent.<\/p>\n\n\n\n
Given:<\/h3>\n\n\n\n
    \n
  • Initial cost of the machine: $18,000<\/li>\n\n\n\n
  • Annual cost savings (benefit): $44,000<\/li>\n\n\n\n
  • Required rate of return: 19 percent<\/li>\n\n\n\n
  • Income taxes: Ignored<\/li>\n\n\n\n
  • Time horizon: Not specified, assume the machine lasts indefinitely or until payback<\/li>\n<\/ul>\n\n\n\n
    Since the machine costs $18,000 and provides annual savings of $44,000, the payback period<\/strong> is:Payback Period=18,00044,000\u22480.41 years\\text{Payback Period} = \\frac{18,000}{44,000} \\approx 0.41 \\text{ years}Payback Period=44,00018,000\u200b\u22480.41 years<\/p>\n\n\n\n
    This is less than one year, which already suggests the investment is quickly recovered.<\/p>\n\n\n\n
    Now, calculate the Net Present Value<\/strong> using the formula for a perpetuity, since no specific life span was mentioned:NPV=Annual Cash Savingsr\u2212Initial Investment\\text{NPV} = \\frac{\\text{Annual Cash Savings}}{r} – \\text{Initial Investment}NPV=rAnnual Cash Savings\u200b\u2212Initial InvestmentNPV=44,0000.19\u221218,000=231,578.95\u221218,000=213,578.95\\text{NPV} = \\frac{44,000}{0.19} – 18,000 = 231,578.95 – 18,000 = 213,578.95NPV=0.1944,000\u200b\u221218,000=231,578.95\u221218,000=213,578.95<\/p>\n\n\n\n
    Conclusion:<\/h3>\n\n\n\n
    The Net Present Value is positive at $213,578.95, which means the investment will generate significantly more in savings than its cost when evaluated at the required rate of return. A positive NPV indicates that the project will increase the value of the company and meet its required return criteria. Furthermore, the short payback period of less than half a year reduces risk and improves liquidity.<\/p>\n\n\n\n
    Therefore, Almendarez Corporation should proceed with the purchase of the machine<\/strong>, as it is a financially sound investment.<\/p>\n\n\n\n
    \"\"<\/figure>\n","protected":false},"excerpt":{"rendered":"
    Almendarez Corporation is considering the purchase of a machine that would cost 130,000andwouldlastfor6years.Attheendof6years,themachinewouldhaveasalvagevalueof18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $44,000. The company requires a minimum pretax return of 19% on all investment projects. (Ignore income taxes.) The Correct Answer and Explanation is: To determine whether Almendarez Corporation […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-33906","post","type-post","status-publish","format-standard","hentry","category-quiz-questions"],"_links":{"self":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/33906","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/comments?post=33906"}],"version-history":[{"count":1,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/33906\/revisions"}],"predecessor-version":[{"id":33918,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/33906\/revisions\/33918"}],"wp:attachment":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/media?parent=33906"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/categories?post=33906"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/tags?post=33906"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}