A company has provided the following data concerning a proposed project (Ignore income taxes.) : Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The annual cost savings must be closest to: (Round your intermediate calculations to 3 decimal places.)

A) $4,024
B) $2,436
C) $1,875
D) $3,704

Question

A company has provided the following data concerning a proposed project (Ignore income taxes.) :

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The annual cost savings must be closest to: (Round your intermediate calculations to 3 decimal places.)

A) $4,024
B) $2,436
C) $1,875
D) $3,704

Collin Coles · Accepted Answer

Final Answer : B, Explanation :  Using the tables provided in Exhibit 14B-1 and Exhibit 14B-2, the appropriate discount factor for a project with a 5-year life and a required rate of return of 10% is 3.791. Taking the annual cost savings of $8,000 and dividing by this discount factor yields a present value of $2,109. This present value is subtracted from the initial investment of $8,000 to give a net present value of -$5,891. Since the net present value is negative, the project should not be undertaken. The annual cost savings closest to the calculated value of $2,109 is $2,436 (the answer option B).

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