Question

Croce, Inc., is investigating an investment in equipment that would have a useful life of 7 years. The company uses a discount rate of 8% in its capital budgeting. The net present value of the investment, excluding the salvage value, is - $515,967. To the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive? (Ignore income taxes.) Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice O $41,277 • $885,021 O $515,967 o $6,449,588

Answer 1

The answer is: B) $885,021

Explanation:

Any new project is financially attractive only if its net present value is equal or more than 0.

In this case, the net present value of the investment project (purchasing new equipment) is negative = -$515,967.

In order for the project to be attractive, the salvage must have a present value of at least $515,967 or an equivalent future value of at least: $515,967 x 1.08⁷ = $515,967 x 1.7138 = 884277.

The closest option is B) $885,021