Question

The management of Enamorado Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines. The aircraft would have a useful life of 5 years. The company uses a discount rate of 17% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is -$160,462. To the nearest whole dollar how large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive?

Answer 1

To make the investment in the aircraft financially attractive for Enamorado Corporation, we need to calculate the required annual intangible benefit using the Present Value of an Annuity formula and the given NPV, discount rate, and life span of the aircraft.

Step-by-step explanation:

The management of Enamorado Corporation is considering the purchase of a small aircraft and is using the concept of present discounted value to analyze the investment. Since the net present value of the investment excluding intangible benefits is -$160,462, we need to determine how large the annual intangible benefit would need to be to make the investment financially viable given a 17% discount rate over a 5-year useful life.

To calculate the required annual intangible benefit, we use the Present Value of an Annuity formula: PV = PMT × [(1 - (1 + r)^-n) / r]. Here, PV represents the desired increase in NPV to reach a breakeven point of $0, PMT is the Payment (annual intangible benefit) we want to find, r is the discount rate (17%), and n is the number of periods (5 years).In this case, the PV needed is equal to the absolute value of the negative NPV, which is $160,462. Solving the formula for PMT with these values will give us the required annual intangible benefit.