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Item 3

Exercise 12-4 (Algo) Uncertain Future Cash Flows [LO12-4]

Lukow Products is investigating the purchase of a piece of automated equipment that will save $110,000 each year in direct labor and inventory carrying costs. This equipment costs $700,000 and is expected to have a 6-year useful life with no salvage value. The companys required rate of return is 8% 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 $700,000 investment? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)