Question

Croce, Inc., is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 16% in its capital budgeting. The net present value of the investment, excluding the salvage value, is ?$578,604. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

How large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

Useful life of the equipment = 9 years

Discount rate = 16%

Net Present Value of Investment excluding salvage value=- $578,604

Present value of salvage value = Present value of cash inflows + Present value of salvage value

-Initial Investment

In the present case Net Present Value of Investment is calculated without taking Present value of salvage value and the Present value of salvage value is obtained as - $578,604.

To make the investment in the equipment financially attractive the salvage value has to be determined. If the present value of salvage value is more than - $578,604 the investment proposal will be accepted.

Present value of $1 at 16% in 9years= 1/ (1.16)⁹ =0.2630

Minimum Amount of salvage value required = $578,604/0.2630= $2,200,016

The salvage value of $2,200,016 will make the Net Present Value of the investment zero. Therefore in order to be acceptable, the project should have a salvage value more than $2,200,016 which will make the Net Present Value positive.