Evaluate an investment project that has uncertain cash

flows.
Learning Objective 4
 Automated Equipment

Intangible
Tangible Benefits
benefits difficult
easy to estimate
to quantify
For example

A company with a 12% discount rate is considering

purchasing automated equipment that would have a 10-
year useful life. Also suppose that a discounted cash flow
analysis of just the tangible costs and benefits shows a
negative net present value of $226,000.
Intangible benefits ≥ $40,000; Then the automated
equipment should be purchased

Intangible benefits < $40,000; Then the automated

equipment should not be purchased
When the salvage value is difficult to estimate.

Suppose that all of the cash flows from an investment in a

super-tanker have been estimated—other than its salvage
value in 20 years. Using a discount rate of 12%,
management has determined that the net present value of
all of these cash flows is a negative $1.04 million. This
negative net present value would be offset by the salvage
value of the supertanker. How large would the salvage
value have to be to make this investment attractive?