Question

lukow priduct is investigating the ourchase of a piece of automated equipment that will save $160000 each year in direct labor and inventory carrying costs. the equipment costs $870000 and is expected to have a7-year yseful life with no salvage value. The company's required rate if return is 9% on all equipment purchases. Management anticipates thst this equipment will provide intangible benefits such ad greater flexibility and higher- wuality output that will result in additional future cash inflow.

what minimum dollar value per year must be provided by the equipments intangible benefits to justify the $870000 investment

Answer 1

Minimum Dollar value per year will be $202586 as per the working given below:

	With Normal return of Income		rate of return
			9%
	Cost of equipment	870000	78300
1	Saving in Direct Labour & Inventory cost	160000	81700
2	Saving in Direct Labour & Inventory cost	160000	81700
3	Saving in Direct Labour & Inventory cost	160000	81700
4	Saving in Direct Labour & Inventory cost	160000	81700
5	Saving in Direct Labour & Inventory cost	160000	81700
6	Saving in Direct Labour & Inventory cost	160000	81700
7	Saving in Direct Labour & Inventory cost	160000	81700
		870000	571900	298100
	(298100/7 years)			42586
	With return of $202586 every year		rate of return
			9%
	Cost of equipment	870000	78300
1	Saving in Direct Labour & Inventory cost(160000+42586)	202586	124286
2	Saving in Direct Labour & Inventory cost	202586	124286
3	Saving in Direct Labour & Inventory cost	202586	124286
4	Saving in Direct Labour & Inventory cost	202586	124286
5	Saving in Direct Labour & Inventory cost	202586	124286
6	Saving in Direct Labour & Inventory cost	202586	124286
7	Saving in Direct Labour & Inventory cost	202586	124286
		870000	870000	0
				42586