Arnold Company Is Acquiring a New Machine with a Life

question 100

Multiple Choice

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine }&\$100,000\\\text { Annual cost savings in cash expenses }&45,000\\\text { Terminal value } & 8,000 \\\text { Maintenance required in the 4th year } & 5,000 \\\text { Book value of the old machine } & 20,000\end{array}$ The new machine would replace an old fully-amortized 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%. Arnold uses the straight-line method for amortization on all machines (ignore the half-year convention) . Note: some amounts are rounded.
The present value of the maintenance cost in year 4 is:

• A) $2,226
• B) $3,180
• C) $954
• D) $420

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Definitions:

Survivor Bias

A logical error that involves focusing on the people or things that survived some process and inadvertently overlooking those that did not because of their lack of visibility.

Financially Successful

A state or condition of having significant income, profit, or assets, exceeding financial liabilities and obligations.

Concert Arena

A large, usually indoor area designed to host musical concerts, sporting events, or other performances, often with significant seating capacity.

Survivor Bias

A logical error that involves focusing on the surviving subjects of a process or people who made it past some selection process, thereby unintentionally overlooking those who did not due to their lack of visibility.