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.
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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