(Ignore income taxes in this problem) Digrande Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 6 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is -$250,113. 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?

Question

Quizplus · Accepted Answer

The salvage value must be large enough to offset the negative net present value of -$250,113. To find the required salvage value, divide the negative NPV by the present value factor for year 6 at 12% (which is approximately 0.5066). Thus, $250,113 / 0.5066 ≈ $493,320.

(Ignore Income Taxes in This Problem) Digrande Corporation Is Investigating