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Lukow Products is investigating the purchase of a piece of automated equipment that will save $130,000 each year in direct labor and inventory carrying costs. This equipment costs $920,000 and is expected to have a 6-year useful life with no salvage value. The company's required rate of return is 11% 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 8B-1 and Exhibit 8B-2. to determine the appropriate discount factor(s) using table. 


Required: 

What dollar value per year would these intangible benefits have to have to make the equipment an acceptable investment? (Round discount factor(s) to 3 decimal places.) 

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EXHIBIT 8B-1 Present Value of $1; ū Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25%EXHIBIT 8B-2 Present Value of an Annuity of $1 in Arrears; 11 - 12 ton] Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%


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✔ Recommended Answer
Answer #1
Annual value
Choose Numerator: / Choose Denominator: = Annual value
Required increase in present value / Factor for 6 years = Annual value
369970 / 4.231 = 87443
Workings:
Annual cash flows 130000
X PV factor 4.231 =(1-(1.11)^-6)/0.11
Present value of Annual cash flows 550030
Less: Investment cost 920000
Net Present value -369970
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