Arnold Company Is Acquiring a New Machine with a Life

question 34

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 cash flows from the sale of the old machine is:

• A)$15,000
• B)$13,395
• C)$16,340
• D)$17,860

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Definitions:

Kaizan Philosophy

A continuous improvement strategy in business, originating from Japan, in which all employees work together to incrementally improve products, services, or processes.

Fostering Change

The process of encouraging and facilitating adjustments in behaviors, processes, or structures within an organization to achieve improvement.

Union

An organized association of workers formed to protect and further their rights and interests; typically involved in labor negotiations and contracts.

Participation

The involvement of individuals or groups in decision-making processes that affect them.