Uncertain Future Cash Flows Union Bay Plastics is investigating the purchase of

Question

Uncertain Future Cash Flows

Union Bay Plastics is investigating the purchase of automated equipment that would save $100,000 each year in direct labor and inventory carrying costs.  This equipment costs $750,000 and is expected to have a 10-year useful lift with no salvage value.  The company%u2019s required rate of return is 15% on all equipment purchases.  This equipment would provide intangible benefits such as greater flexibility and higher-quality output that are difficult to estimate and yet are quite significant.

Required:

(Ignore income taxes)

What dollar value per year would the intangible benefits have to have in order to make the equipment an acceptable investment?

Explanation / Answer

Hi,

Please find the answer as follows:

Annual Cash Inflows Required = PMT(Rate,Nper,PV,FV)

Rate = 15%

Nper = 10

PV = -750000

FV = 0

Annual Cash Inflows = =PMT(15%,10,-750000,0) = 149439.05

Less Yearly Savings = 100000 (savings in labor and inventory carrying costs)

Minimum yearly intangible benefits = 149439.05 - 100000 = 49439.05 or 49439

Thanks.

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