Cabe Corporation uses a discount rate of 18% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 7 years has thus far yielded a net present value of -$155,606. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (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.Ignoring any salvage value, to the nearest whole dollar how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

Question

Quizplus · Accepted Answer

To make the investment financially attractive, the net present value (NPV) needs to be zero or positive. Currently, the NPV is -$155,606. To offset this negative NPV, additional cash flows from intangible benefits are needed. Using the discount rate of 18% for a 7-year period, the present value factor from the tables (assuming Exhibit 14B-1 and Exhibit 14B-2 are standard present value tables) for an annuity is approximately 3.812. To find the annual cash flow required to offset the negative NPV, divide the negative NPV by the present value factor: $155,606 / 3.812 ≈ $40,820.

Cabe Corporation Uses a Discount Rate of 18% in Its