Highpoint, Incorporated, is considering investing in automated equipment with a ten-year useful life. Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation, but have been unable to estimate the cash flows associated with the intangible benefits. Using the company's 12% required rate of return, the net present value of the cash flows associated with just the tangible costs and benefits is a negative $282,500. How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment? (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Question

Quizplus · Accepted Answer

To make the investment financially acceptable, the net present value (NPV) needs to be zero or positive. Given a negative NPV of $282,500 from tangible costs and benefits, we need to find the annual net cash inflows from intangible benefits that would offset this negative NPV. Using the 12% required rate of return over a 10-year period, we look for the annuity factor that corresponds to these parameters. The annuity factor for 12% over 10 years is 5.65. To find the annual cash inflow required, we divide the negative NPV by the annuity factor: $282,500 / 5.65 = approximately $50,000. Therefore, the annual net cash inflows from intangible benefits need to be $50,000 to make the investment financially acceptable.

Highpoint, Incorporated, Is Considering Investing in Automated Equipment with a Ten-Year