(Ignore income taxes in this problem.) The Corporation uses a discount rate of 1

Question

(Ignore income taxes in this problem.) The Corporation uses a discount rate of 15% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 6 years has thus far yielded a net present value of -$196,163. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment.
Required:
a. Ignoring any salvage value, how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

Explanation / Answer

a Minimum annual cash flows from the intangible benefits = Negative net present value to be offset/Present value factor = 196163/3.784= 51840 b Minimum salvage value = Negative net present value to be offset/Present value factor = 196163/0.432= 454081

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

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