Question

XYZ Company is considering the purchase of a new piece of equipment and has gathered the following information about the purchase: Initial investment ........ ... Annual cost savings ........ Salvage value in 6 years ..... Repair in 4 years Cost of capital ... Life of project ............... biect ......... ? $30,000 20% of original cost of the equipment $11,000 10% 6 years If the new piece of equipment is purchased then the equipment currently being used can be sold at the time of purchase of the new equipment for $8,000. The before-tax net present value of this new equipment was -$10,790. Calculate the salvage value for this piece of equipment. Ignore income tax effects. You will need to use the present value table factors posted in carmen to answer this question. To access these factors, click modules and then scroll to weeks 13 & 14. Click on the link labeled present value table factors. No credit will be awarded for this question using a means other than these table factors to answer this question.

Answer 1

We know that NPV = PV of inflow - PV of outflow

Let us

Year	Cash flow	PV Factor	PV
0	$    8,000.00	1	$     8,000.00
1	$ 30,000.00	0.9091	$   27,273.00
2	$ 30,000.00	0.8264	$   24,792.00
3	$ 30,000.00	0.7513	$   22,539.00
4	$ 30,000.00	0.683	$   20,490.00
4	$(11,000.00)	0.683	$    (7,513.00)
5	$ 30,000.00	0.6209	$   18,627.00
6	$ 30,000.00	0.5645	$   16,935.00
6		0.5645	$                 -
			$ 131,143.00

Let original value be V

So we have

-10,790 = 131,143 + 0.2 V X 0.5645 - V

141,933 = 0.8871 V
V = $ 159,996.62 or $ 160,000 (approximately)