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 .............  $20,000
Salvage value in 6 years ........  20% of original cost of the equipment
Repair in 4 years ...............  $14,000
Cost of capital .................     10%
Life of project .................   6 years

The net present value of this new equipment was -$37,779.

Calculate the salvage value for this piece of equipment.

You will need to use the time value of money table factors posted in
carmen to answer this question. To access these factors, click modules
and then scroll to week 8. Click on the link labeled present & future
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

Year	Cash Flow	PV Factor	Present Value
		1 / (1+10%)^Year
1	$        20,000	0.9091	$   18,182.00
2	$        20,000	0.8264	$   16,528.00
3	$        20,000	0.7513	$   15,026.00
4	$        20,000	0.683	$   13,660.00
4	$      (14,000)	0.683	$    (9,562.00)
5	$        20,000	0.6209	$   12,418.00
6	$        20,000	0.5645	$   11,290.00
			$   77,542.00

Let Initial Investment be Z

NPV = PV of Cash Inflow - PV of Cash Outflow
-37,779 = 77,542 + 0.1129 Z - Z
115,321 = 0.8871 Z
Z = $ 129,997.75