Question

quiz 3

Devon Corporation uses a discount rate of 8% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 6 years has thus far yielded a net present value of ?$497,341. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using the tables provided.

Required:

a. Ignoring any salvage value, how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

(Round your final answers to the nearest whole dollar amount.)

Answer 1

Solution a:

NPV of equipment = -$497,341

Discount rate = 8%

Additional cash flow per year from intangible benefits to make investment in automated equipment financially attractive = (Difference in Present value of cash outflows and PV of cash inflow) / Cumulative PV Factor at 8% for 6 periods

= $497,341 / 4.62288 = $107,583

Solution b:

Salvage value ot make the investment in automated equipment finanicall viable = $497341 / PV Factor at 8% for 6th period

= $497,341 / 0.63017

= $789,218