(Ignore income taxes in this problem.) Lajeunesse Corporation uses a discount rate of 19% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -$127,991. 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.
-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) should be zero or positive. The NPV is currently -$127,991. To offset this, the present value of the additional cash flows from intangible benefits must equal $127,991. Using the present value of annuity formula for 8 years at a 19% discount rate, the additional cash flow needed per year is approximately $32,370.

(Ignore Income Taxes in This Problem