Chico Company Is Considering the Purchase of a New High-Speed

question 124

Essay

Chico Company is considering the purchase of a new high-speed machine for its factory.The machine will cost $160,000 and will save the company $45,000 per year in cash operating costs.The machine has an estimated useful life of five years and no expected salvage value.The company's cost of capital is 12%.
Required:
1)Compute the net present value of this investment.
2)What is the maximum amount that Chico should be willing to pay for the machine?
3)What are the minimum annual cash savings that will make the machine acceptable on a net present value basis if the purchase price is $160,000?

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Definitions:

Sub-Classified

Categorized under a more specific or narrow classification within a broader grouping.

Recognition Criteria

The standards or requirements that must be met for a particular item to be reported or included on a company's financial statements, ensuring the item's relevance and reliability.

Faithful Representation

When an economic phenomenon is depicted completely, neutrally, and free from material error.

Economic Benefits

are the advantages or gains that entities expect to receive as a result of certain actions or investments, often measured in terms of cash flows or cost savings.