Lukow Products is investigating the purchase of a piece of automated equipment t
ID: 2528730 • Letter: L
Question
Lukow Products is investigating the purchase of a piece of automated equipment that will save $400,000 each year in direct labor and inventory carrying costs. This equipment costs $2,500,000 and is expected to have a 15-year useful life with no salvage value. The company’s required rate of return is 20% 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 13B-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 amounts with a minus sign.)
2. What minimum dollar value per year must be provided by the equipment’s intangible benefits to justify the $2,500,000 investment?
https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/Garrison_16e/exhibit_13B_1.jpg
https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/Garrison_16e/exhibit_13B_1.jpg
Explanation / Answer
Answer:-
Items
Years
Amount of cashflow
20%factor
Present Value of cash flow
Cost of Equipment
Now
$(2500,000)
1.000
$(2,500,000)
Annual cost saving
115
$400,000
4.675
Net Present Value
$(630,000)
The annual value of the intangible benefits would have to be great enough to offset a $630,000 negative present value for the equipment
b.
= $630,000/4.675
Annual value = $ 134,759
Items
Years
Amount of cashflow
20%factor
Present Value of cash flow
Cost of Equipment
Now
$(2500,000)
1.000
$(2,500,000)
Annual cost saving
115
$400,000
4.675
$1,870,000Net Present Value
$(630,000)
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