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 $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 138-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table Ebioc 2E any 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? 1. Net present value 2. Minimum dollar value

Explanation / Answer

Year(s) Amount ofCash Flows PV factor Present Valueof CashFlows Cost of the equipment Now -2500000 1 -2500000 Annual cost savings 1-15 400000 4.675 1870000 Net present value -630000 2 Minimum dollar value =630000/4.675= $134759

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.