The manager of George Pty Ltd is planning to purchase equipment costing $5000. The equipment will reduce operating costs by approximately $2000 per year over its three-year life. The manager has decided to purchase the equipment because over the three years the company will save $1000. The major problem with the manager's analysis is that:

A) the manager does not consider the time value of money.
B) the manager used the internal rate of return rather than the present value.
C) the manager did not use the annuity method.
D) the amount to be saved is only an approximation.

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Appiah Emmanuel · Accepted Answer

Final Answer : A, Explanation :  The major problem with the manager's analysis is that they do not consider the time value of money. The $1000 in savings over three years is not adjusted for the cost of capital or the opportunity cost of the funds used to purchase the equipment. A proper analysis would involve calculating the present value of the savings using a appropriate discount rate.

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