Question

Cullumber, Inc. is considering purchasing equipment costing $30,000 with a 6-year useful life. The equipment will provide annual cost savings of $7,400 and will be depreciated straight-line over its useful life with no salvage value. Cullumber requires a 10% rate of return. Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 15% 6 4.623 4.486 4.355 4.231 4.111 3.784 What is the approximate profitability index associated with this equipment? 1.04 1.24 1.07 0.73

          Cullumber, Inc. is considering purchasing equipment costing $30,000 with a 6-year useful life. The equipment will provide annual cost savings of $7,400 and will be depreciated straight-line over its useful life with no salvage value. Cullumber requires a 10% rate of return.

Present Value of an Annuity of 1              
Period
8%
9%
10%
11%
12%
15%
6
4.623
4.486
4.355
4.231
4.111
3.784

What is the approximate profitability index associated with this equipment?
1.04
1.24
1.07
0.73

Added by Tracy S.

Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

Instant Answer

Solved by Expert Benjamin Densmore

Step 1

- Equipment cost: $30,000 - Useful life: 6 years - Annual cost savings: $7,400 - Depreciation: Straight-line with no salvage value - Required rate of return: 10% - We need to calculate the profitability index Show more…

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Cullumber, Inc. is considering purchasing equipment costing $30,000 with a 6-year useful life. The equipment will provide annual cost savings of $7,400 and will be depreciated straight-line over its useful life with no salvage value. Cullumber requires a 10% rate of return. Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 15% 6 4.623 4.486 4.355 4.231 4.111 3.784 What is the approximate profitability index associated with this equipment? 1.04 1.24 1.07 0.73