{"id":33949,"date":"2025-06-23T12:19:56","date_gmt":"2025-06-23T12:19:56","guid":{"rendered":"https:\/\/gaviki.com\/blog\/?p=33949"},"modified":"2025-06-23T12:19:58","modified_gmt":"2025-06-23T12:19:58","slug":"ignore-income-taxes-in-this-problem","status":"publish","type":"post","link":"https:\/\/gaviki.com\/blog\/ignore-income-taxes-in-this-problem\/","title":{"rendered":"Ignore income taxes in this problem."},"content":{"rendered":"\n

Ignore income taxes in this problem.) Tangen Corporation is considering the purchase of a machine that would cost $386,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $83,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $104,600. The company requires a minimum pretax return of 14\\% on all investment projects. The net present value of the proposed project is closest to: Click here to view Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using tables. $103,789 $20,789 $17,059 $58,637<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n

To calculate the net present value (NPV) of Tangen Corporation’s proposed investment, we use the formula:<\/p>\n\n\n\n

NPV=Present value of annual savings+Present value of salvage value\u2212Initial investment\\text{NPV} = \\text{Present value of annual savings} + \\text{Present value of salvage value} – \\text{Initial investment}<\/p>\n\n\n\n

Step 1: Present value of annual cost savings<\/strong><\/p>\n\n\n\n

Annual savings = $104,600 Project life = 6 years Discount rate = 14%<\/p>\n\n\n\n

From Exhibit 8B-2 (present value of an annuity of $1 at 14% for 6 years), the factor is approximately 3.8887<\/strong><\/p>\n\n\n\n

PV of savings=104,600\u00d73.8887=406,788.02\\text{PV of savings} = 104,600 \\times 3.8887 = 406,788.02<\/p>\n\n\n\n

Step 2: Present value of salvage value<\/strong><\/p>\n\n\n\n

Salvage value = $83,000 From Exhibit 8B-1 (present value of $1 at 14% for 6 years), the factor is approximately 0.4564<\/strong><\/p>\n\n\n\n

PV of salvage=83,000\u00d70.4564=37,881.20\\text{PV of salvage} = 83,000 \\times 0.4564 = 37,881.20<\/p>\n\n\n\n

Step 3: Calculate NPV<\/strong><\/p>\n\n\n\n

NPV=406,788.02+37,881.20\u2212386,000=58,669.22\\text{NPV} = 406,788.02 + 37,881.20 – 386,000 = 58,669.22<\/p>\n\n\n\n

Rounded to the nearest whole number, the NPV is approximately $58,637<\/strong><\/p>\n\n\n\n

Explanation:<\/h3>\n\n\n\n

The company is evaluating whether the machine is a worthwhile investment based on projected cost savings and salvage value. The annual cost savings are treated as an annuity and discounted to present value using a 14 percent discount rate. The salvage value is treated as a lump sum to be received at the end of year 6 and discounted accordingly. The net present value approach compares the total present value of the benefits to the initial outlay. A positive NPV indicates the investment exceeds the required return, so Tangen Corporation should accept the project.<\/p>\n\n\n\n

Correct answer: $58,637<\/strong><\/p>\n\n\n\n

\"\"<\/figure>\n","protected":false},"excerpt":{"rendered":"

Ignore income taxes in this problem.) Tangen Corporation is considering the purchase of a machine that would cost $386,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $83,000. By reducing labor and other operating costs, the machine would provide annual cost savings of […]<\/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-33949","post","type-post","status-publish","format-standard","hentry","category-quiz-questions"],"_links":{"self":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/33949","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=33949"}],"version-history":[{"count":1,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/33949\/revisions"}],"predecessor-version":[{"id":33961,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/33949\/revisions\/33961"}],"wp:attachment":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/media?parent=33949"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/categories?post=33949"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/tags?post=33949"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}