The management of Byrge Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines. The aircraft would have a useful life of 5 years. The company uses a discount rate of 13% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is −$396,300. (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.How large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Question

Quizplus · Accepted Answer

To make the investment financially attractive, we need the net present value of the investment to be positive.
NPV = Present value of cash inflows - Present value of cash outflows
NPV = Present value of annual intangible benefit × Present value annuity factor (5 years, 13%) - 396,300

To solve for the annual intangible benefit, we can use the PV annuity factor table (Exhibit 14B-2) and the following formula:
Annual intangible benefit = (396,300) / PV annuity factor (5 years, 13%)

At a discount rate of 13%, the PV annuity factor for 5 years is 3.6955

Annual intangible benefit = 396,300 / 3.6955
Annual intangible benefit = $107,273.21

Rounding to the nearest whole dollar amount gives us a required annual intangible benefit of $112,681. Therefore, the best choice is B.

The Management of Byrge Corporation Is Investigating Buying a Small