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. Present Value of an Ordinary Annuity Table 2 - Present Value of an Ordinary Annuity of $1 at Compound Interest Period 5% 6% 70/ 8% 9% 10% 11% 12% 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 1.859 1.833 1.80B 1.783 1.759 1.736 1.713 1.690 2.723 2.673 2.624 2.577 2.531 2.487 2.444 3.546 3.465 3.38 3.312 3.240 3.170 3.102 3.037 4.329 1.212 1.100 3.993 3.791 3.696 3.605 5.076 4.91 4.767 .623 4.486 4.355 4.231 4.111 5.582 5.38 5.206 5.033 4.868 1712 4.564 5.78 6.463 6.210 5.97 5.747 5.535 5.335 5.146 1.965 7.105 6.80 6.51 5.247 5.995 5.759 5.537 5.328 10 7.727 .360 7.024 .710 6.418 6.145 5.689 5.650 3.306 7.887 7.49 7.139 6.605 6.495 6.207 5.936 B.863 3.384 7.943 7.536 7.161 6.814 6.492 6.194 9.394 B.853 3.35 7.904 7.487 7.103 6.750 6.424 668' 9.295 3.745 8.244 7.786 7.367 6.982 6.626 14 10.350 9.717 9.10B 3.559 8.061 7.606 7.191 6.811 10.838 10.106 9.447 B.851 8.313 7.824 7.379 6.974 11.274 10.477 9.763 9.122 8.544 B.022 7.549 7.120 7.250 11.690 10.828 10.059 9.372 8.756 8.201 7.702 7.366 19 12.085 11.158 10.336 9.604 8.950 B.365 7.839 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 Using the previous table, enter the correct factor for three periods at 5%: Periodic Present x Factor payment value $6,000 x 2.723 $16,336 The controller at Bolden has determined that the company could save $8,000 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 Bolden purchases this type of machinery is 8%, what is the maximum amount the company should pay for the machine? $ X (Hint: This is basically a present value of an ordinary annuity problem as highlighted above.) Assume that the actual cost of the machine is $40,000. Weighing the present value of the benefits against the cost of the machine, should Bolden purchase this piece of machinery? Yes