Rosenholm Corporation uses a discount rate of 16% in its capital budgeting. Part
ID: 2484050 • Letter: R
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 $328,400. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.
Ignoring any salvage value, how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive? (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount. Enter all your answer as positive value. Omit the "$" 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)
Considering NPV as the value of investment.
Value of investment = annual benefit x PVIFA (16%, 5)
328,400 = Annual benefit x 3.27429
Annual benefit = 100,297
b)
Value of investment = Salvage value x PVIF (16%, 5)
328,400 = Salvage value x 0.476113
Salvage value = 328,400/ 0.476113
= 689,752
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