Arnold Company Is Acquiring a New Machine with a Life

question 83

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: Cost of new machine $100,000
Annual cost savings in cash expenses 45,000
Terminal value 8,000
Maintenance required in the 4th year 5,000
Book value of the old machine 20,000
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:

Average Product

The output produced per unit of input, calculated by dividing total output by the total number of units of the input used.

Nonlabor Resources

Resources used in the production of goods and services that do not involve labor, such as capital, land, and raw materials.

Worker

An individual who performs tasks or services for compensation; commonly refers to employees or laborers in various industries.

Average Variable Costs

The cost per unit of producing each good or service, excluding any fixed costs.