Exercise 14-4 (Algo) Uncertain Future Cash Flows [LO14-4]
Lukow Products is investigating the purchase of a piece of automated equipment that will save $110,000 each year in direct labor and inventory carrying costs. This equipment costs $820,000 and is expected to have a 7-year useful life with no salvage value. The company’s required rate of return is 7% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using table.
Required:
1. What is the net present value of the piece of equipment before considering its intangible benefits? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)
2. What minimum dollar value per year must be provided by the equipment’s intangible benefits to justify the $820,000 investment? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
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2.
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Please show work, thank you
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