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 $940,000 and is expected to have a 7-year 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 higher-quality output that will result in additional future cash inflows. Click here to view Exhibit 14B-1 and Exhibit 14B-2, 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 $940,000 investment? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
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 $940,000 and is expected to have a 7-year 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 higher-quality output that will result in additional future cash inflows. Click here to view Exhibit 14B-1 and Exhibit 14B-2, 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 $940,000 investment? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Exercise 14-4 (Algo) Uncertain Future Cash Flows [LO14-4]
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 $940,000 and is expected to have a 7-year 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 higher-quality output that will result in additional future cash inflows.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, 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 $940,000 investment? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
Transcribed Image Text:EXHIBIT 14B-2
Present Value of an Annuity of $1 in Arrears;
1-
((1+r))"
Periods
4%
5%
6%
7%
8%
9%
11%
0.935 0.926 0.917 0.909 0.901
10%
12%
13%
14%
15%
16%
17%
19%
0.893 0.8850.877 0.870 0.862 | 0.855 0.847 0.840 | 0.833 0.826 0.820 0.813 0.806 0.800
18%
0.962 0.952 0.943
1.886
1
20%
21%
22%
23%
24%
25%
1.859
1.833
1.808
1.783
1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547
1.759
2.723 2.673 2.624 2.577 2.531
1.528 1.509 1.492 | 1.474| 1.457 1.440
3
2.775
2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 2.074 2.042 2.011
3.630 3.546 3.465
4.452 4.329
5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.231
6.002
| 1.981
3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.540 2.494 2.448 2.404
4
1.952
4.212 | 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 | 2.991 2.926 2.864 2.803
2.362
2.689
3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 3.245 3.167 3.092 3.020 2.951
5.786 5.582 5.389 5.206 5.033 4.868 4.712 | 4,564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3.508 3.416 3.327 3.242 3.161
4.111
6.210 5.971 5.747 5.535 5.335
6.247 5.995 5.759
6.418 6.145
8
6.733
6.463
5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.726 3.619 3.518 3.421
3.329
5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 3.905 3.786 3.673 | 3.566 3.463
5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494. 4.339 4.192 4.054 3.923| 3.799 3.682 3.571
7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 | 5.029 4.836 4.656 4.486 4.327 4.177 4.035 3.902 3.776 3.656
5.197 4.988 4.793 4.611 4.439 4.278 4.127 3.985 3.851 3.725
7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 4.362 4.203 4.053 3.912 3.780
4.432 4.265 4.108 3.962 3.824
7.435
6.802
7.722 7.360
8.760 8.306 7.887
9
7.108
6.515
10
8.111
7.024
6.710
11
8.384 7.943 7.536
8.358 7.904
12
9.385
9.986 9.394
10.563 9.899
11.118 10.380 9.712
11.652 10.838 10.106 9.447 8.851
12.166 11.274 10.477 9.763 9.122
12.659 11.690 10.828 10.059 9.372 8.756 8.201
13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366 6.938 | 6.550 6.198 5.877 5.584 5.316 5.070 4.843 4.635 | 4.442 4.263
13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 5.929 5.628 | 5.353 5.101
14.029 12.821 11.764 10.836 10.017 9.292 | 8.649 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127
14.451 13.163 12.042 11.061 10.201 9.442 8.772 8.176 7.645 7.170 6.743 6.359 6.011
14,857 13.489 12.303 11.272 10.371 9.580 8.883 8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925 4.703 4.499 4.311
15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 | 4.937| 4.713 4.507 4.318 4.143
15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 7.330 | 6.873 6.464 6.097 | 5.766 5.467 | 5.195 | 4.948 | 4.721
15.983 14.375 13.003 11.826 10.810 9.929
16.330 14.643 | 13.211 11.987 10.935 10.027 9.237 | 8.548 7.943 | 7.409 6.935 | 6.514 6.136 5.798 5.492 | 5.215 | 4.964 | 4.734 4.524 4.332 4.154
16.663 | 14.898 13.406 12.137 11.051 10.116 9.307 8.602 7.984 7.441
16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.650 8.022 | 7.470 6.983 | 6.551 6.166 5.820 | 5.510 | 5.229 4.975 4.743 4.531 | 4.337 4.159
17.292 | 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496
19.793 17.159 15.046 | 13.332 11.925 10.757| 9.779 8.951
8.863
6.814 6.492 6.194 5.918 5.660 5.421
13
8.853
14
9.295
8.745
8.244
7.786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 | 5.008 | 4.802 | 4.611
9.108| 8.559
7.606 7.191
6.811 6.462 6.142 5.847 | 5.575 5.324 5.092 | 4.876 4.675 4.489
4.315 4.153
8.061
8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 4.536 4.357 4.189 4.033 3.887
8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.219 4.059
15
4.001
3.859
16
17
3.910
18
7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033
4.812 | 4.608 4.419 4.243
4.080 3.928
4.097 | 3.942
19
4.870 4.657 4.460 4.279 4.110
4.675 4.476 4.292 4.121
4.488 4.302 4.130
4.137
3.954
20
4.891
3.963
21
5.696 5.410 5.149 4.909 4.690
22
3.976
23
3.981
24
4.514 4.323
4.147
3.985
25
8.488 7.896 7.372 6.906 6.491
6.118 5.783 5.480 5.206 4.956 4.728 4.520
4.328 | 4.151
3.988
9.161
26
| 3.990
4.157 | 3.992
| 3.994
27
6.961 6.534 6.152 5.810 5.502 5.223 4.970 4.739 4.528 4.335
28
4.160 | 3.995
4.347 4.166 3.999
29
6.566 6.177 5.829
5.517 |
5.548 | 5.258 | 4.997 | 4.760 | 4.544
7.003
5.235 4.979 4.746 4.534 4.339
30
8.244 7.634 7.105 6.642 6.233 5.871
40
MAY
tv
Transcribed Image Text:EXHIBIT 14В-1
Exercise 14A-1 (Algo) Basic Present Value C
Present Value of $1;
1
((1 +r))"
Periods
4%
5%
6%
7%
8%
9%
0.943 0.935 0.926 0.917 0.909 | 0.901
10%
11%
12%
1 |0.893
13%
14%
15%
16%
17%
18%
0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820
1
19%
20%
21%
22%
25%
0.890 | 0.873 0.857 0.842 | 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.683 0.672 0.661 0.650 0.640
23%
24%
2
0.925
0.907
0.813 0,806 0.800
3
0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731
0.693 0.675 0.658 0.641 0.624
0.823 | 0.792 0.763 | 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 | 0.482 | 0.467 | 0.451 0.437 0.423 0.410
0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 | 0.386 0.370 0.355 | 0.341 0.328
0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 | 0.335 | 0.319 | 0.303 | 0.289 | 0.275 | 0.262
0.609 0.593 0.579 0.564 0.551 0.537
0.537 0.524 0.512
4
0.855
5
6.
0.790
0.760 0.711
0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351
7
0.665 0.623 0.583
0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.263 0.249 0.235
8
0,222
0.210
0.327 0.305 0.285 0.266 0.249 0.233 0.218 0.204
0.191
0,168
0.645 0.592 | 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.180 0.167 0.155 0.144 | 0.134
0.179
0.703
0.676 | 0.614 0.558
0.650 0.585 0.527 0.475 0.429 0.388 0.350 | 0.317 0.287 0.261
0.625 | 0.557 0.497
10
0.508 0.463
0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191
0.176 0.162 0.149 0.137 0.126 0.116 0.107
0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.123 0.112 0.103 0.094 0.086
11
0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.102 | 0.092
0.601| 0.530 0.469 0.415 0.368 0.326 | 0.290 0.258 0.229 | 0.204 0.182 | 0.163 0.145 0.130 0.116 0.104 0.093 0.084 0.075 0.068 0.061 0.055
12
0.083
0.076 | 0.069
13
0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111
0.577
0.555 0.481
0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044
0.045 0.040 0.035
14
0.275 0.239 0.209 0.183 0.160 0.140 |'0.123 0.108 0.095 0.084 0
0.534 0.458 0.394 | 0.339 0.292 0.252 | 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 0.047 0.042 | 0.036 0.032 0.028
15
0.417 | 0.362 0.315
0.074 0.065 0.057 0.051
16
0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
0.039 0.034 0.030 0.026 0.023
0.513 0.436 0.371
0.494 0.416
0.317 0.270 0.231
| 0.198
|
0.044 0.038 0.032 0.028
0.043 0.037 0.031 0.027 | 0.023
17
0.095 0.081
0.138 0.116 0.098 0.083 0.070 | 0.060 0.051
0.024 0.021 0.018
0.020
18
0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111
0.069 0.059 0.051
19
0.475
0.396 0.331
0.277 0.232 0.194 0.164
0.017
0.014
0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 | 0.037 0.031
0.359 0.294 0.242 0.199 0.164 | 0.135 0.112 0.093 0.077 0.064 | 0.053 0.044 0.037 0.031
| 0.101
0.026 | 0.022 0.019 | 0.016 | 0.014 0.012
0.009
0.009 | 0.007
20
0.026 0.022 |
0.018 0.015
0.013 0.011
0.439
0.422 0.342 0.278 0.226 0.184 0.150 0.123
0.406 0.326 0.262 0.211
0.390 0.310
0.375 0.295 0.233 0.184 0.146 0.116 0.092 0.074 0.059 | 0.047 0.038 0.030 0.024 | 0.020 | 0.016| 0.013 | 0.010 0.009 0.007 0.006 0.005 0.004
21
0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013 0.011
22
0.170 0.138 0.112 0.091 0.074 0.060 | 0.049 0.040 0.033 0.027 0.022 | 0.018 0.015 0.012 0.010 0.009 0.007 0.006
0.005
23
24
0,247 0.197 0.158 0.126 0.102 0.082 0.066 0.053 0.043 0.035 0.028 | 0.023 0.019 0.015 | 0.013 | 0.010| 0.008 0.007 | 0.006
25
0.003
0.003 0.002
0.003 0.002 0.002
0,014| 0.011 0.009
0.007 0.006 0.005
0.004
0.361
0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 | 0.026 0.021 | 0.017 0
26
0.347 0.268 0.207 0.161
0.125 0.098 0.076 0.060 0.047 0.037 0.029 0.023 0.018 0.014 0.011 0.009 0.007 0.006 0.005 | 0.004
27
0.196 0.150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 0.012 0.010
0.107 0.082 0.063 0.048 0.037 0.029 0.022 0.017 0.014 0.011
| 0.008
0.008 0.006 0.005 | 0.004
0.006 | 0.005 0.004
0.003 | 0.002 0.002 0.002
0.002 | 0.001
0.000 | 0.000 0.000
28
0,333
0.321
0.308 0.231
0.208
0.255
0.003 0.003
0.001 | 0.001 0.000 | 0.000
0.243 0.185 0.141
0.033 0.026 0.020 | 0.015 0.012 0.009 0.007 0.005 0.004
0.008 0.005 0.004 | 0.003 0.002 0.001
29
0.002
0.075 0.057 0.044
0.174 0.131
0.097 0.067 0.046 0.032 0.022 0.015 0.011
30
0.099
40
0.142 |
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