Lukow Products is investigating the purchase of a piece of automated equipment that will save $140,000 each year in direct labor and inventory carrying costs. This equipment costs $730,000 and is expected to have a 6-year useful life with no salvage value. The company’s required rate of return is 16% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.
Required:
What dollar value per year would these intangible benefits have to have to make the equipment an acceptable investment? (Use the tables to determine the discount rate.)
