Question

TB Problem Qu. 13-171 Devon Corporation uses a discount...

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 8 years has thus far yielded a net present value of −$498,941. 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:

Required present value of additional cash flow from intangible benefits to make equipment financially attractive = $498,941

Let Required Annual cash flow from intangible benefits = X

X * Cumulative PV factor at 8% for 8 periods = $498,941

X * 5.746639 = $498,941

X = $86,823

Hence required additional cash flow per year from the intangible benefits = $86,823

Solution b:

Let required salvage value to make equipment financially attractive = X

Now required present value of salvage value = $498,941

X * PV Factor at 8% for 8th period = $498,941

X * 0.540269 = $498,941

X = $498,941 / 0.540269 = $923,505

Hence required salvage value from equipment = $923,505