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The management of Kobler Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 10% in its capital budgeting. Good estimates are available for the initial investment and the annual cash operating outflows, but not for the annual cash inflows and the salvage value of the equipment. The net present value of the initial investment and the annual cash outflows is -$235,421. Click here to view Exhibit 13B-2 to determine the appropriate discount factor(‘s) using tables. Ignoring any salvage value, to the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive? $23,542 $235,421 $62,100 $47,084
Expert Answer
since the net present value of the initial investment is -$235,421, the NPV of the annual cash flows has to be atleast $235,421 for the equipment to be financially viable.
annual payment factor for 5 annual payments at a discount rate of 10% is 3.7908.
hence, the value of annual cash inflow = $235,421/3.7908 = $62,103.47
Option C is correct.
