Help Save & Exit Submit Lukow Products is investigating the purchase of a piece
ID: 2582569 • Letter: H
Question
Help Save & Exit Submit Lukow Products is investigating the purchase of a piece of automated equipment that will save $120,000 each year in direct labor and inventory carrying costs. This equipment costs $910,000 and is expected to have a 11-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 138-2, 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.) 2. What minimum dollar value per year must be provided by the equipment's intangible benefits to justify the $910,000 investment? 1. Net 2. Prev 2 of 5 Next >Explanation / Answer
SOLUTION
(1) Net present value-
(2) Minimum dollar value-
= Required increse in present value / Factor of 11 years
= $131,200 / 6.49 = $20,216
Item Year Amount of cash flows ($) 10% factor Present value of cash flows ($) Cost of the equipment Now (910,000) 1.00 (910,000) Annual cost savings 11 120,000 6.49 778,800 Net Present Value (131,200)Related Questions
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