Question

Lukow Products is investigating the purchase of a piece of automated equipment that will save $100,000 each year in direct labor and inventory carrying costs. This equipment costs $750,000 and is expected to have a 7-year useful life with no salvage value. The company’s required rate of return is 7% 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.

Answer 1

Answer:

The intangible benefit should generate 39,164.92 dollars of cahs flow per year

or a present value of 211,071.06 dollars

Explanation:

The company should evaluate teh investment based on wether or not the required return on the 15% investment is achieve or not:

We should calculate the target PMT and the proceed to an estimation of how muich are this intangible benefits:

$PV \div \frac{1-(1+r)^{-time} }{rate} = C$

PV 750,000

time 7 years

rate 7% = 7/100 = 0.07

$750000 \div \frac{1-(1+0.07)^{-7} }{0.07} = C$

C  $ 139,164.915

explicit cost savings: 100,000

intangible benefit to make the investment worthwhile:

139,164.92 - 100,000 = 39,164.92

we can also solve for the present valeu of the annual intnagible benefit as they can vary every year:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C $ 100,000

time 7 years

rate 0.07

$100000 \times \frac{1-(1+0.07)^{-7} }{0.07} = PV$

PV $538,928.9402

investment          750,000

cost savings PV: (538,928.94)

PV of the intangible benefit: 211,071.06