Chapter 12, Problem 4E

Uncertain Future Cash Flows
Lukow Products is investigating the purchase of a piece of automated equipment that will save $400,000 each w in direct labor and inventory carrying up costs. This equipment costs $2,500,000 and is expected to have a 15-year useful life with no salvage value. The company’s required rate of return is 20% 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.
Required:
1. What is the net present value of the piece of equipment before considering its intangible benefits?
2, What minimum dollar value per year must be provided by the equipment’s intangible benefits to justify the $2. 500,000 investment?