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The management of Londo Corporation is investigating buying a small used aircraf

ID: 2655353 • Letter: T

Question

The management of Londo Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines. The aircraft would have a useful life of 5 years. The company uses a discount rate of 14% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is $395,850. (Ignore income taxes in this problem)

$395,850

$115,307

$79,170

$55,419

The management of Londo Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines. The aircraft would have a useful life of 5 years. The company uses a discount rate of 14% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is $395,850. (Ignore income taxes in this problem)

Click here to view Exhibit 13B-2 to determine the appropriate discount factor(s) using tables. How large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive? (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount.)

Explanation / Answer

$115,307 Statement showing computation of PVF Time   PVF Working Notes'                                                                          1.00                                                  0.877 1/1.14                                                                          2.00                                                  0.769 .8772/1.14                                                                          3.00                                                  0.675 .7695/1.14                                                                          4.00                                                  0.592 .6750/1.14                                                                          5.00                                                  0.519 .5921/1.14                                                  3.433 NPV                                       (395,850.00) PVF for 5 Years                                               3.4330 Minimum annual intangible benefit = -NPV/PVF                                       115,307.31 Thus annual intangible benefit of minimum $115,307 would make the investment financially Attractive