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 $30,000 20% of original cost of the equipment $11,000 10% Repair in 4 years Cost of capital Life of project 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 $9,000. The before-tax net present value of this new equipment was -$18,661. Calculate the salvage value for this piece of equipment. Ignore the effects of income taxes.

Answer 1

NPV = PV of cash flows-initial investment

Suppose initial investment = X

Salvage = 0.20X

Year	Cash flows	PVfactor at 10%	PV of cash flows
0	[X-$9,000]	1	-($X-$9,000)
1-6	$30,000	4.3553	$130,659[$30,000*4.3553]
4	-$11,000	0.6830	-$7,513
6	0.20X	0.5645	0.1129X
		NPV	[$130,659+0.1129X-X+$9,000-$7,513]

NPV= Present value of cashflow-Initial investment

-$18,661=$130,659+0.1129X-X+9,000-7,513

-$18,661=132,146-0.8871X

0.8871X=150,807

X=$170,000

Initial investment = $170,000

Salvage =0.20*170,000

=$34,000

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