Reference: 10-13
Jimbob Co Jimbob Co Uses a 10% Discount Rate and the Incremental Cost

question 36

Multiple Choice

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine B } \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.
-Given the following data: $$\begin{array} { | l | l | } \hline \text { Present investment required } & \$ 12,000 \\\hline \text { Net present value } & \$ 430 \\\hline \text { Annual cost savings } & \$ ? \\\hline \text { Discount rate } & 12 \% \\\hline \text { Life of the project } & 10 \text { years } \\\hline\end{array}$$ Based on the data given, the annual cost savings would be:

• A)$2,123.89.
• B)$2,200.00.
• C)$1,630.00.
• D)$2,553.89.

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