(Ignore income taxes in this problem.) Bleeker Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft 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 initial investment and the annual operating cash cost is -$240,849. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft.
-Ignoring any salvage value, to the nearest whole dollar how large would the annual benefit have to be to make the investment in the aircraft financially attractive?

Question

Quizplus · Accepted Answer

To make the investment financially attractive, the net present value (NPV) should be zero or positive. The NPV is currently -$240,849. To find the required annual benefit, we need to calculate the annuity that has a present value of $240,849 at a 12% discount rate over 8 years. Using the annuity present value factor for 8 years at 12% (which is approximately 4.968), the annual benefit required is $240,849 / 4.968 = $48,480.

(Ignore Income Taxes in This Problem