Exercise 124 Uncertain Future Cash Flows [LO124]
Lukow Products is investigating the purchase of a piece of automated equipment that will save $150,000 each year in direct labor and inventory carrying costs. This equipment costs $860,000 and is expected to have a 6year useful life with no salvage value. The company’s required rate of return is 14% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higherquality output that will result in additional future cash inflows.
Click here to view Exhibit 12B1 and Exhibit 12B2, to determine the appropriate discount factor(s) using table.
Required:
1. What is the net present value of the piece of equipment before considering its intangible benefits? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)
2. What minimum dollar value per year must be provided by the equipment’s intangible benefits to justify the $860,000 investment? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
Exercise 125 Preference Ranking [LO125] Information on four investment proposals is given below:
Required: 1. Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.) 2. Rank the proposals in terms of preference.

1  
Annual cost savings  150000  
Multiplied by 12% Factor  3.889  
Present value of Annual cost savings  583350  
Less: Cost of the equipment  860000  
Net present value  (276650)  
2  
Amount of intangible benefits = Required increase in present value/Factor for 8 years  
Minimum dollar value = 276650/3.889= $71137  
Exercise 125  
Profitability Index = Net present value/Investment required  
Investment Proposal  Profitability Index  Rank Preference  
A  0.42  Second  =124800/300000 
B  0.37  Third  =51700/140000 
C  0.51  First  =51100/100000 
D  0.33  Fourth  =501700/1500000 
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