Bruno Is Acquiring a New Machine with a Life of 5

question 25

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 terminal cash flows is:

• A) $3,175
• B) $8,000
• C) $4,536
• D) $1,361

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Definitions:

Consumer Product Safety Act

A federal law aimed at protecting consumers from unsafe products, establishing guidelines and standards for product manufacture and sale.

Product Safety

Involves regulations and standards designed to ensure goods and services are safe for consumer use and do not cause harm.

Mandatory Standards

Regulations and criteria that must be followed and met by products, services, or activities, often for safety, health, or environmental reasons.

Pure Food and Drugs Act

An early 20th-century law aimed at regulating the labeling and safety of food and pharmaceuticals in the United States.