(Ignore income taxes in this problem.) Picado, Inc. is investigating an investment in equipment that would have a useful life of 8 years. The company uses a discount rate of 9% in its capital budgeting. The net present value of the investment, excluding the salvage value, is -$389,000. 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?

Question

Quizplus · Accepted Answer

To make the investment financially attractive, the salvage value must offset the negative NPV of -$389,000. The present value factor for a single sum at 9% for 8 years is approximately 0.5019. Therefore, the salvage value needed is $389,000 / 0.5019 = $774,900.

(Ignore Income Taxes in This Problem