Rosenholm Corporation uses a discount rate of 16% in its capital budgeting. Part

Question

Rosenholm Corporation uses a discount rate of 16% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 5 years has thus far yielded a net present value of ?$327,300. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.)

Click here to view Exhibit 13B-1 http://lectures.mhhe.com/connect/0078111005/Exhibit/Exhibit 13B-1.jpg and or

Exhibit 13B-2 - See imaged attached to help determine the appropriate discount factor(s) using tables.

Ignoring any salvage value, how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive? (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive? (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Chegg responders/helpers - If you respond to this question, please show your work on how you got the answer.

Thanks,

Rosenholm Corporation uses a discount rate of 16% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 5 years has thus far yielded a net present value of ?$327,300. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.)

Explanation / Answer

We have NPV = -327300, nper = 5 & Rate=16%

For NPV to be positive, PV of addl CFs should be greater than 327300 ie 327301.

we need Annual CFs = PMT

SO Min Annual CF = PMT*PVA(16%,5) = 3.352*PMT

So PMT = 327301/3.352 = $97,643 .....Ans (a)

Salvage happens at end of Year5. So we need to find PV of Salvage which should be greater than 327300

So PV of Salvage = Salvage*PV(16%,5)

ie 327301 = Salvage*0.476

So Salvage = 327301/0.476 =$687,607

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