Question

Assume that a company is considering buying a new piece of equipment for $280,000 that would...

Assume that a company is considering buying a new piece of equipment for $280,000 that would have a useful life of five years and a salvage value of $30,000. The equipment would generate the following estimated annual revenues and expenses: Revenues $ 120,000 Less operating expenses: Commissions $ 15,000 Insurance 5,000 Depreciation 50,000 Maintenance 30,000 100,000 Net operating income $ 20,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. The company also believes that this investment would provide some annual intangible benefits that are difficult to quantify. Assuming a discount rate of 15%, the minimum dollar value per year that must be provided by the equipment’s intangible benefits to justify the $280,000 investment is closest to: Multiple Choice $44,134. $53,084. $9,084. $134.

Homework Answers

Answer #1
Net operating income 20000
Add: Depreciation 50000
Annual cash flows 70000
Annual cash flows 70000
X PV factor 3.352 =(1-(1.15)^-5)/0.15
Present value of Annual cash flows 234640
Salvage value 30000
X PV factor 0.497 =1/1.15^5
Present value of salvage value 14910
Total present value 249550 =234640+14910
Less: Investment cost 280000
Net present value -30450
Negative Net present value 30450
Divide by PV factor 3.352
Minimum dollar value per year 9084
$9,084 is correct option
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