(Ignore income taxes in this problem.) The management of Kobler Corporation is i

Question

(Ignore income taxes in this problem.) The management of Kobler Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 10% in its capital budgeting. Good estimates are available for the initial investment and the annual cash operating outflows, but not for the annual cash inflows and the salvage value of the equipment. The net present value of the initial investment and the annual cash outflows is -$235,421.

Ignoring any salvage value, to the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?

$235,421

$23,542

$47,084

$62,100

Explanation / Answer

Present value of annuity = P×[1-(1÷(1+r)^n)]÷r

r is interest rate per period

P is payment per period

n is number of payments

$235,421 = P×[1-(1÷(1+10%)^5)]÷10%

Annual increase in cash flows required, P = $62,100

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