Question

Question 3 4.5 pts XYZ Company is considering the purchase of a new piece of equipment and has gathered the following information about the purchase: $20,000 20% of or Initial investment .............. Annual cost savings ............. Salvage value in 6 years ........ iginal cost of the equipment Repair in 4 years .... Cost of capital ................. Life of project ....... $14,000 10% 6 years The net present value of this new equipment was -$37,779. Calculate the salvage value for this piece o f equipment. You will need to use the time value of money table factors posted in carmen to answer this question. To access th ese factors, click modules and then scroll to week 8. Click on the link labeled present & future value table factors. No credit will be award ed for this question using a means other than these table factors to an swer this question.

Answer 1

Solution Annual cost savings $20,000 $14,000 Repairs in 4 years Salvage value in 6 years 20% of cost Net present value ($37,779) Cost of capital 10% Life of project (in Years) 6 Let's assume that the Original cost of the equipment is 'X'. then, Salvage value will be 0.20 X Calculate Net Present value Present value Cash Present Period flows Value Factor Initial investment -X 0 -х Annual cost savings $20,000 1-6 4.3553 $87,106 ($14,000) ($9,562) Repairs 4 0.6830 Salvage value 0.20X 6 0.5645 0.1129 X Net present value $77,544 - 0.8871 X Equating the calculated net present value with the given in the question, $77,544 0.8871 X= -37,779 $77,544 $37,779) / 0.8871 = $130,000 X Original cost of the equipment $130,000 Salvage value $130,000 x 20% = $26,000 Salvage Value $26,000