The most simple and commonly used method of determining the present value of an
ID: 2718872 • Letter: T
Question
The most simple and commonly used method of determining the present value of an ordinary annuity is to multiply the incremental payout by the appropriate rate found on the present value of an ordinary annuity table.
Click here to open PV table of Annuity of $1
Using the previous table, enter the correct factor for three periods at 5%:
The controller at Stone has determined that the company could save $4,000 per year in engineering costs by purchasing a new machine. The new machine would last 10 years and provide the aforementioned annual monetary benefit throughout its entire life. Assuming the interest rate at which Stone purchases this type of machinery is 10%, what is the maximum amount the company should pay for the machine? $ (Hint: This is basically a present value of an ordinary annuity problem as highlighted above. Round your final answer to the nearest whole dollar.)
Periodic payment x Factor = Present value $6,000 x - Select your answer -1.859412.828612.723253.54595Correct 1 of Item 4 = $16,340Explanation / Answer
solution:-Present value of an annuity:-Annuity amount*PVAF(r,n)
= 4000*PVAF(10%,10 years)
=4000*6.145
=$24580
So the maximum amount the company pay for the machine is $24580.