Posted by Roydell on Friday, July 24, 2009 at 12:46pm.
Union Bay Plastics is investigating the purchase of automated equipment that would save $100,000 each year in direct labor and inventory carrying costs. This equipment costs $740,000 and is expected to have a 9-year useful life with no salvage value. The company requires a minimum 17% rate of return on all equipment purchases. This equipment would provide intangible benefits such as greater flexibility and higher-quality output that are difficult to estimate and yet are quite significant. (Ignore income taxes.)
To determine the appropriate discount factor(s) using tables, click here to view Exhibit 14B-1 and Exhibit 14B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.
Required:
What dollar value per year would the intangible benefits have to be worth in order to make the equipment an acceptable investment? (Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
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