Quetario Company is considering purchasing a machine that would save the company $ 13,500 in cash per year for six years, at the end of which the machine would be retired with no residual value. The firm wishes to earn a minimum return of 8 percent, compounded annually, on any such investment. Assume that the cash savings occur at year- end, and ignore income taxes.
Required:
1. What is the maximum amount that the firm should be willing to pay for this machine? Show your computations.
2. Would the maximum amount be different if the machine is expected to have a residual value of $ 4,000 at the end of six years? Explain.
3. As an alternative to the scenario in (2), the company could buy a machine that had no residual value and offered no cost savings for the first five years, but this machine would offer cost savings of $ 113,561 at the end of the sixth year. If the company can buy only one machine, which one should it be? Defend your answer.