Question

Choice Co. uses a discount rate of 8% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of ($496,541) [a negative number]. 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. (Ignore income taxes.) Use the attached (in the exam introduction) present value tables to determine the appropriate discount factor(s). Use it to the .000 decimal. Or, use your calculator or Excel present value function. 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

Answer 1

Answer:

A. $86,400

B. $919,520

Explanation:

A. Calculation to determine 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

Using this formula

Additional cash flows from the intangible benefits = Negative net present value to be offset / Present value factor

Let plug in the formula

Additional cash flows from the intangible benefits = $496,541 / 5.747

Additional cash flows from the intangible benefits = $86,400

Therefore 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 is $86,400

b. Calculation to determine how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive

Using this formula

Automated equipment Salvage value = Negative net present value to the offset /Present value factor

Let plug in the formula

Automated equipment Salvage value= $496,541 / 0.540

Automated equipment Salvage value= $919,520

Therefore how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive is $919,520