The management of Hansley Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 18% in its capital budgeting. Good estimates are available for the initial investment and the annual cash operating outflows, but not for the annual cash inflows and the salvage value of the equipment. The net present value of the initial investment and the annual cash outflows is -$273,300. (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.Ignoring any salvage value, to the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?
A) $54,660
B) $49,194
C) $87,400
D) $273,300

Question

Quizplus · Accepted Answer

To make the investment financially attractive, the net present value (NPV) should be zero or positive. Given the NPV of initial investment and annual cash outflows is -$273,300, the annual cash inflows need to offset this amount. Using a discount rate of 18% over 5 years, the appropriate discount factor from the annuity table is 3.127. Therefore, the annual cash inflow required is calculated as $273,300 / 3.127 = $87,400 (rounded to the nearest whole dollar).

The Management of Hansley Corporation Is Investigating an Investment in Equipment