The management of Hansley Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 18% in its capital budgeting. Good estimates are available for the initial investment and the annual cash operating outflows, but not for the annual cash inflows and the salvage value of the equipment. The net present value of the initial investment and the annual cash outflows is -$273,300. (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 the cash inflows, 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?
A) $625,400
B) $1,518,333
C) $273,300
D) $49,194

Question

Quizplus · Accepted Answer

The salvage value of the equipment would have to be $625,400 to make the investment in the equipment financially attractive. This is because the net present value of the initial investment and the annual cash outflows is -$273,300, and the salvage value would need to be large enough to offset this negative value and make the overall investment positive.

The Management of Hansley Corporation Is Investigating an Investment in Equipment