(Ignore income taxes in this problem.) Bleeker Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 8 years. The company uses a discount rate of 12% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is -$240,849. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft.
-Ignoring the annual benefit, 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 of the aircraft would have to be equal to the present value of the initial investment and the annual operating cash cost. Using a financial calculator, we can calculate that the present value of the costs is $240,849. To find the salvage value that would make the investment financially attractive, we need to solve for the future value that would equal $240,849 after 8 years at a discount rate of 12%. This gives us a salvage value of $596,161, which is option D.

(Ignore Income Taxes in This Problem