Lukow Products is investigating the purchase of a piece of automated equipment t
ID: 2453788 • Letter: L
Question
Lukow Products is investigating the purchase of a piece of automated equipment that will save $120,000 each year in direct labor and inventory carrying costs. This equipment costs $710,000 and is expected to have a 7-year useful life with no salvage value. The company's required rate of return is 9% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows. Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using table. Required: What dollar value per year would these intangible benefits have to have to make the equipment an acceptable investment? (Use the tables to determine the discount rate.)Explanation / Answer
Compute the required increase in present value
Compute the Annual Value
Annual Value = 107,126 / 5.02395 = $21,323.062.
Therefore, the increase in intangible annual benefits should be more than $21,323.062 to accept the proposal.
Year Cash Flows Discount Present value of cash flows 0 -710000 1 -710000 1 to 7 120000 5.02395 602874 Net Present Value -107126Related Questions
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