Rosenholm Corporation uses a discount rate of 18% in its capital budgeting. Part

Question

Rosenholm Corporation uses a discount rate of 18% 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 $328,500. 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 and Exhibit 13B-2 to 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. Enter all your answer as positive value. 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. Enter all your answer as positive value. Omit the "$" sign in your response.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.

Explanation / Answer

a. Let the additional cash flow per year from intangible benefits be F.

Present value of F at discount rate of 18% for 5 years = 3.127F

3.127F = $ 328,500 or F = $ 105,053

Minimum annual cash flows need to be $ 105,053

b. Let the salvage value be S. Assuming that the equipment is sold at the end of the 5th year, salvage value is 0.437S at a discount rate of 18%.

0.437 S = $ 328,500 or S = $ 751,716

Minimum salvage value has to be $ 751,716

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