The management of Osborn Corporation is investigating an investment in equipment that would have a useful life of 4 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is - $405,014. How large would the annual cash inflow have to be to make the investment in the equipment financially attractive? (Ignore income taxes.)

Question

Business

Zachery Moon

4 July, 04:22

The management of Osborn Corporation is investigating an investment in equipment that would have a useful life of 4 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is - $405,014. How large would the annual cash inflow have to be to make the investment in the equipment financially attractive? (Ignore income taxes.)

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Eliezer Hogan · Answer 1

The equipment shall be financially attractive when we have annual cash inflow in excess of 132,686

Explanation:

Calculate the PVIFA (Present value of interest factor annuity) at r = 12 % and n = 4 years

= [ 1 - (1.12) - 4 ] / 0.12 = 3.03734935

Minimum annual cash flow needed = Investment / PVIFA = 403,014 / 3.03734935

= 132686

The equipment shall be financially attractive when we have annual cash inflow in excess of 132,686