Present Value of an Annuity of $1.00 Received at the End of Each Period
The payback period to replace the old machine with the new machine is (Points : 6) 3.3
years.
3.0
years.
4.0
years.
2.5
years.
(TCO 7) The Valley Corporation is considering (as of 1/1/08) the replacement of an old machine that is currently being
used. The old machine is fully depreciated but can be used by the corporation through 2011. If Valley decides to replace
the old machine Baker Company has offered to purchase it for $50000 on the replacement date. The disposal value of the
old machine would be zero at the end of 2011. Valley uses the straight-line method of depreciation for all classes of
machinery.
If the replacement occurs a new machine would be acquired from Busby Industries on January 2 2008. The purchase price of
$500000 for the new machine would be paid in cash at the time of replacement. Due to increased efficiency of the new
machine estimated annual cash savings of $150000 would be generated through 2011 the end of its expected useful life.
The new machine is expected to have a zero disposal price at the end of 2011.
All operating cash receipts operating cash expenditures and applicable tax payments and credits are assumed to occur at
the end of the year. Valley uses the calendar year for reporting purposes.
Discount tables for several different interest (discount) rates that are to be used in any discounting calculations are
given below. Unless told otherwise assume that Valley is not subject to income taxes.

Present Value of $1.00 Received at the End of the Period

Present Value of an Annuity of $1.00 Received at the End of Each Period

If Valley is subject to an income tax rate of 30% and a required rate of return of 8% the net present value for replacing
the old machine with the new machine is
(Points : 6)
$46500.
$21675.
$71675.
($334425).