Union Bay
Plastics is investigating the purchase of automated equipment that would save
$100,000 each year in direct labor and inventory carrying costs. This
equipment costs $750,000 and is expected to have a 10-year useful lift with no
salvage value. The company’s required rate of return is 15% 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 have in order to make the
equipment an acceptable investment?
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