The management of Londo Corporation is investigating buying a small used aircraf

Question

The management of Londo Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines. The aircraft would have a useful life of 5 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is $395,150. (Ignore income taxes in this problem) Click here to view Exhibit 13B-2 to determine the appropriate discount factor(s) using tables. How large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive?

Explanation / Answer

Net PV of investment without intangible benefits= $   (395,150) Year 1 Year 2 Year 3 Year 4 Year 5 PV factors @12%              0.893        0.797       0.712        0.636        0.567 Total PV annuity factor for 5 years=            3.6048 Assume the annual intangible benefit required=k So 3.6048*k=395,150 k=$109617.73 So annual Intangible benefits need to be   greater than $109,618 to justify the investment.

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