Asked by Laura Derhamer on Jul 11, 2024
Verified
(Ignore income taxes in this problem.)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 -$496,541.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.
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?
Intangible Benefits
These are advantages that cannot be easily measured in monetary terms, such as brand reputation or employee morale.
Discount Rate
The rate used in discounted cash flow analysis to determine the present value of future cash flows, reflecting the opportunity cost of capital.
Salvage Value
The estimated residual value of an asset at the end of its useful life, important for calculating depreciation.
- Develop competency in and apply the Net Present Value (NPV) tactic in the analysis of capital expenditure decisions.
- Integrate non-quantitative factors such as intangible benefits and salvage value in the evaluation of capital budgeting projects.
Verified Answer
HR
hafizuddin RichaamiinJul 15, 2024
Final Answer :
a.Minimum annual cash flows from the intangible benefits
= Negative net present value to be offset ÷ Present value factor
= $496,541 ÷ 5.747 = $86,400
b.Minimum salvage value
= Negative net present value to the offset ÷ Present value factor
= $496,541 ÷ 0.540 = $919,520
= Negative net present value to be offset ÷ Present value factor
= $496,541 ÷ 5.747 = $86,400
b.Minimum salvage value
= Negative net present value to the offset ÷ Present value factor
= $496,541 ÷ 0.540 = $919,520
Learning Objectives
- Develop competency in and apply the Net Present Value (NPV) tactic in the analysis of capital expenditure decisions.
- Integrate non-quantitative factors such as intangible benefits and salvage value in the evaluation of capital budgeting projects.