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:

Moralistic

Pertaining to the expression of ideas about what is right or wrong behavior; often involving the imposition of moral standards onto others.

Superego

In Freudian psychoanalysis, the part of the personality that represents internalized ideals, moral standards, and conscience, acting to suppress urges of the id and striving to make the ego act morally.

Moral Component

The aspect of a decision, action, or character that pertains to principles of right and wrong behavior.

Personality

The unique combination of characteristics and traits that define an individual's patterns of thought, emotion, and behavior.