Jojola Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 5 years. The company uses a discount rate of 13% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is -$439,238. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Ignoring any salvage value, to the nearest whole dollar how large would the annual benefit have to be to make the investment in the aircraft financially attractive?

A) $439,238
B) $124,890
C) $87,848
D) $57,101

Question

Courtney Clements · Accepted Answer

Final Answer : B, Explanation :  The financial attractiveness of the investment would be achieved if the net present value is positive, which means that the sum of the present values of the annual benefits and the salvage value minus the present value of the initial investment and the annual operating cash cost is greater than zero. Since the salvage value is unknown, we can focus on the annual benefit. Using the formula for net present value, we can calculate that the present value of the annual benefit would have to be approximately $124,890 to make the investment financially attractive. This can be found by solving for PMT in the annuity table with a discount rate of 13% and a number of periods of 5 years.

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