Exercise 12-4 Uncertain Future Cash Flows [LO12-4]

Lukow Products is investigating the purchase of a piece of automated equipment that will save $120,000 each year in direct labor and inventory carrying costs. This equipment costs $770,000 and is expected to have a 5-year useful life with no salvage value. The companys required rate of return is 9% 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 12B-1 and Exhibit 12B-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 equipments intangible benefits to justify the $770,000 investment? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Information on four investment proposals is given below:

		Investment Proposal
	A			B			C			D
Investment required	$	(132,000	)	$	(142,000	)	$	(112,000	)	$	(183,000	)
Present value of cash inflows		211,200			193,120			161,280			267,180
Net present value	$	79,200		$	51,120		$	49,280		$	84,180
Life of the project		5 years			7 years			6 years			6 years

Required:

1. Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.)

2. Rank the proposals in terms of preference.