Rosenholm Corporation uses a discount rate of 18% in its capital budgeting. Part
ID: 2481356 • Letter: R
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 $328,900. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.
Ignoring any salvage value, how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive? (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount. Enter all your answer as positive value. Omit the "$" 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
Answer A
Additonal cashflow * PV fator for 5 years @18% = 328900
Additional cashflow * 3.127 = 328900
Additional cashflow = 328900/3.127
= 105181
Additional cashflow of $105181 will result in 0 NPV hence cashflow more than this will make the project financialy attarative.
Answer B
Salvage value * PV fatcor of year 5 @18% = 328900
Salvage value * 0.437 = 328900
Salvage value = 328900/0.437
= 752632
Salvage value of $ 752632 will result in 0 NPV hence the salvage value more than 752632 will result in positive NPV and will make project financially attractive.
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