(Ignore income taxes in this problem.) Gimar Corporation uses a discount rate of 16% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -$423,974. 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.
-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) should be zero or positive. The NPV is currently -$423,974. The salvage value must be large enough to offset this negative NPV. Using the present value factor for 8 years at 16% (0.305), the required salvage value is calculated as $423,974 / 0.305 = $1,390,079.

(Ignore Income Taxes in This Problem