Evaluate an

investment project
that has uncertain
cash flows.
Learning Objective 4
Tangible Benefits Intangible benefits
easy to estimate difficult to quantify

Automated
Equipment
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.
YOUR TEXT

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?
 THANKS
BASADRE JESSA G