(Ignore Income Taxes in This Problem

question 132

Multiple Choice

(Ignore income taxes in this problem.) Gimar Corporation uses a discount rate of 16% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -$423,974. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment.
-Ignoring any salvage value, to the nearest whole dollar how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

• A) $67,836
• B) $423,974
• C) $97,600
• D) $52,997

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Definitions:

Inelastic

Describes a situation where the demand or supply for a good or service is not significantly altered when the price changes.

Elastic

A characteristic of a product or service indicating that a change in price leads to a significant change in the quantity demanded or supplied.

Laffer Curve

An illustration of the relationship between tax rates and tax revenue, suggesting that there is an optimal tax rate that maximizes revenue.

Tax Rate Reductions

A decrease in the percentage at which income or transactions are taxed by governmental authorities.