Bruno Is Acquiring a New Machine with a Life of 5

question 10

Multiple Choice

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine } & \$ 100000 \\\text { Annual cost savings in cash expenses } & 45000 \\\text { Terminal value } & 8000 \\\text { Maintenance required in the 4th year } & 5000 \\\text { Book value of the old machine } & 20000\end{array}$ The new machine would replace an old fully-depreciated 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%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention) .
The present value of the cash flows from the sale of the old machine is:

• A) $17,860
• B) $15,000
• C) $13,395
• D) $16,340

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Definitions:

Chi-Square Distribution

A statistical distribution that is used to determine the goodness of fit of an observed distribution to an expected one under the null hypothesis.

Critical Value(s)

Specific point(s) on a distribution curve that define the threshold for rejecting the null hypothesis in hypothesis testing.

Level Of Significance

A threshold in hypothesis testing below which the null hypothesis is rejected, indicating statistical significance.

P-Value

The probability of obtaining a test statistic at least as extreme as the one observed during a test, assuming the null hypothesis is true.