Cabe Corporation uses a discount rate of 18% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 7 years has thus far yielded a net present value of -$155,606. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Ignoring any cash flows from intangible benefits, to the nearest whole dollar how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

Question

Quizplus · Accepted Answer

To make the investment financially attractive, the net present value (NPV) needs to be zero or positive. The current NPV is -$155,606. To offset this negative NPV, the salvage value needs to be discounted back to its present value using the 18% discount rate over 7 years. Using the discount factor for 7 years at 18% (which is approximately 0.315), the salvage value needed can be calculated as follows: $155,606 / 0.315 = $494,309.52, which rounds to approximately $495,561 when looking for the nearest whole dollar. This means the salvage value would need to be about $495,561 to make the NPV zero and the investment financially attractive.

Cabe Corporation Uses a Discount Rate of 18% in Its