Question

Exercise 14-4 (Static) Uncertain Future Cash Flows [L014-4] Lukow Products Is Investigating the purchase of a plece of automated equipment that will save $400,000 each year in direct labor and Inventory carrying costs. This equipment costs $2,500,000 and is expected to have a 15-year useful life with no salvage value. The company's required rate of return is 20% 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 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using table. Required: 1. What is the net present value of the plece of equipment before considering its Intangible benefits? (Enter negative amounts with a minus slgn.) 2 What minimum dollar value per year must be provided by the equipment's Intangible benefits to justify the $2,500,000 Investment? (Do not round Intermediate calculations. Round your answers to the nearest whole dollar amount.) 1. Net present value Minimum dollar value 2.

Answer 1

1
Annual cost savings	400000
X PV factor	4.675	=(1-(1.20)^-15)/0.20
Present value of Annual cost savings	1870000
Less: Investment cost	2500000
Net present value	-630000
2
Negative Net present value to offset	630000
Divide by PV factor	4.675
Minimum dollar value	134759