Lukow Products is investigating the purchase of a piece of automated equipment t

Question

Lukow Products is investigating the purchase of a piece of automated equipment that will save $110,000 each year in direct labor and inventory carrying costs. This equipment costs $760,000 and is expected to have a 8-year useful life with no salvage value. The company's required rate of return is 10% 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 138-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table. Required 1. What is the net present value of the piece of equipment before considering its intangible benefits? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) 2. What minimum dollar value per year must be provided by the equipment's intangible benefits to justify the $760,000 investment? 1. Net present value 2. Minimum dollar value

Explanation / Answer

Solution 1:

Solution 2:

In order to justify investment, equipment to provide present value of intangible benefits equal to $173,158 so that overall NPV of project should be zero.

Therefore

Minimum dollar value per year intangible benefits = Present value of intangible benefits / Cumulative PV factor at 10% for 8 years

= $173,158 / 5.334926 = $32,457.43

Computation of NPV - Lukow Products (before considering intangible benefits) Particulars Amount Period PV Factor Present Value Cash Outflows: Cost of Investment $760,000.00 0 1 $760,000.00 Present Value of Cash Outflows (A) $760,000.00 Cash Inflows: Cost saving in direct labor and inventory carrying cost $110,000.00 1-8 5.334926 $586,841.88 Present Value of Cash Inflows (B) $586,841.88 Net Present Value (B-A) -$173,158.12

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