Atlantic Princess Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be scuttled. Atlantic Princess's cost of capital is 12
percent, and its marginal tax rate is 40 percent. Refer to Atlantic Princess Corporation. If the ship produces equal annual labor cost savings over its 10-year life, how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar.) Present value tables or a financial calculator are required.
a. $68,492
b. $115,154
c. $88,492
d. $157,487
C
NPV of Labor Savings = $500,000
Use PV of Annuity Table 10 years, 12%; Constant = 5.6502
$500,000 / 5.6502 = $88,492
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