Question

Choice Co. 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) [a negative number]. 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. (Ignore income taxes.) Use the attached (in the exam introduction) present value tables to determine the appropriate discount factor(s). Use it to the .000 decimal. Or, use your calculator or Excel present value function. 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

Answer 1

To compensate for the current negative NPV of $496,541, Choice Co. would require a salvage value of approximately $918,916.71 at the end of the equipment's 8-year lifespan, calculated using the present value factor at an 8% discount rate over 8 years.

Step-by-step explanation:

To determine how large the salvage value must be to make the investment in automated equipment financially attractive, we can use the concept of present discounted value (PDV). From the information given, Choice Co. has a current net present value (NPV) of a negative $496,541 and uses a discount rate of 8% over 8 years. The salvage value must generate a PDV equal to or greater than this deficit to bring the NPV to zero or positive, making the investment financially viable.

First, we need the present value factor for a single sum received in 8 years at an 8% discount rate. Using present value tables or a calculator, the factor is approximately 0.5403. Now, we compute the required salvage value:

Required Salvage Value = |NPV| / Present Value Factor

Required Salvage Value = $496,541 / 0.5403

Required Salvage Value ≈ $918,916.71

Therefore, ignoring any cash flows from intangible benefits, the automated equipment needs a salvage value of at least approximately $918,916.71 at the end of its 8-year life to make the investment financially attractive for Choice Co.

Answer 2

A. $86,400

B. $919,520

Step-by-step explanation:

A. Calculation to determine 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

Using this formula

Additional cash flows from the intangible benefits = Negative net present value to be offset / Present value factor

Let plug in the formula

Additional cash flows from the intangible benefits = $496,541 / 5.747

Additional cash flows from the intangible benefits = $86,400

Therefore 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 is $86,400

b. Calculation to determine how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive

Using this formula

Automated equipment Salvage value = Negative net present value to the offset /Present value factor

Let plug in the formula

Automated equipment Salvage value= $496,541 / 0.540

Automated equipment Salvage value= $919,520

Therefore how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive is $919,520