The Petty Company has analyzed an investment opportunity costing $270,000 and determined That the net present value is $1,420. Petty's management estimated that the investment would Generate cash inflows of $50,000 a year for eight years and used a discount rate of 10%. What was the Salvage value associated with the investment opportunity? Note: Present value tables are needed.

Question

Quizplus · Accepted Answer

The net present value (NPV) formula is NPV = (Cash inflows * PVIFA) + (Salvage value * PVIF) - Initial investment. Given that the NPV is $1,420, the initial investment is $270,000, the cash inflows are $50,000 per year for 8 years, and the discount rate is 10%, we can calculate the salvage value. The Present Value Interest Factor for Annuity (PVIFA) for 8 years at 10% is approximately 5.335, and the Present Value Interest Factor (PVIF) for 8 years at 10% is approximately 0.467. Plugging the values into the formula: $1,420 = ($50,000 * 5.335) + (Salvage value * 0.467) - $270,000. Solving for the salvage value gives approximately $10,000.

The Petty Company Has Analyzed an Investment Opportunity Costing $270,000