The management of Osborn Corporation is investigating an investment in equipment
ID: 2547048 • Letter: T
Question
The management of Osborn Corporation is investigating an investment in equipment that would have a useful life of 4 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is $403,014. To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive? (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.
Explanation / Answer
Calculate the PVIFA ( Present value of interest factor annuity ) at r = 12 % and n = 4 years
= [ 1 - (1.12)-4 ] / 0.12 = 3.03734935
Minimum annual cash flow needed = Investment / PVIFA = 403,014 / 3.03734935
= 132686
The equipment shall be financially attractive when we have annual cash inflow in excess of 132,686
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