The management of Osborn Corporation is investigating an investment in equipment that would have a useful life of 8 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is -$401,414. To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive? (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 attractive, the net present value (NPV) needs to be positive. We can calculate the required annual cash inflow by using the formula:

Required annual cash inflow = NPV / PVIFA

Where PVIFA is the present value interest factor of an annuity (from Exhibit 14B-2). PVIFA for 8 years at a discount rate of 12% is 4.9676.

So, Required annual cash inflow = (-$401,414) / 4.9676 = -$80,800 (negative sign indicates cash outflow)

To make the investment financially attractive, the annual cash inflow needs to be equal to or greater than $80,800. The closest answer choice is C, which is $80,800. Therefore, the best choice is C.

The Management of Osborn Corporation Is Investigating an Investment in Equipment