Lukow Products is investigating the purchase of automated equipment that will save $100,000 each year in direct labor and inventory carrying costs. This equipment costs $750,000 and is expected to have a 7-year useful life with no salvage value. The company’s required rate of return is 7% on all equipment purchases. Management expects this equipment to provide intangible benefits such as greater flexibility and higher-quality output that will increase future cash inflows. What is the net present value of the piece of equipment before considering its intangible benefits? What minimum dollar value per year must be provided by the equipment’s intangible benefits to justify the $750,000 investment?
Lukow Products is investigating the purchase of automated equipment that will save $100,000 each year in direct labor and inventory carrying costs. This equipment costs $750,000 and is expected to have a 7-year useful life with no salvage value. The company’s required rate of return is 7% on all equipment purchases. Management expects this equipment to provide intangible benefits such as greater flexibility and higher-quality output that will increase future cash inflows. What is the net present value of the piece of equipment before considering its intangible benefits? What minimum dollar value per year must be provided by the equipment’s intangible benefits to justify the $750,000 investment?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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Question
Lukow Products is investigating the purchase of automated equipment that will save $100,000 each year in direct labor and inventory carrying costs. This equipment costs $750,000 and is expected to have a 7-year useful life with no salvage value. The company’s required
- What is the
net present value of the piece of equipment before considering its intangible benefits? - What minimum dollar value per year must be provided by the equipment’s intangible benefits to justify the $750,000 investment?
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