Boe Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 9 years. The company uses a discount rate of 10% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is −$439,527. Management is having difficulty estimating the salvage value of the aircraft. To the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Question

Quizplus · Accepted Answer

To make the investment financially attractive, the salvage value must be large enough to make the net present value positive. So we need to solve for the salvage value that makes the net present value zero. Using the formula for net present value, we can solve for the salvage value:
-439,527 + Salvage Value/(1+0.1)^9 = 0
Salvage Value = 1,036,620
Therefore, the salvage value would need to be $1,036,620 to make the investment financially attractive.

Boe Corporation Is Investigating Buying a Small Used Aircraft for the Use