Arnold Company Is Acquiring a New Machine with a Life

question 20

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 terminal cash flows is:

• A)$8,000
• B)$4,536
• C)$1,361
• D)$3,175

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Definitions:

Ediacaran

The geological period approximately 635 to 541 million years ago, preceding the Cambrian, known for its distinct soft-bodied fauna.

Photosynthetic Pigments

Substances produced by plants, algae, and certain bacteria to absorb sunlight and convert it into chemical energy during photosynthesis.

Enzymes

Biological molecules that act as catalysts, speeding up reactions in living organisms without being consumed in the process.

Toxins

Poisonous substances produced by living organisms, often used as defense mechanisms against predators or to incapacitate prey.