QUESTION 3

Uncertain Future Cash Flows

Jannsen Limited is investigating the purchase of solar panels that would save $100,000 each year in electricity costs. This solar panels cost $750,000 and is expected to have a 10-year useful life with no salvage value. The company requires a minimum 15% 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.

Required:

(Ignore income taxes.)

What dollar value per year would the intangible benefits have to be worth in order to make the solar panels an acceptable investment?