(Ignore income taxes in this problem.) Lajeunesse Corporation uses a discount rate of 19% 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 -$127,991. 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 find the salvage value, we need to calculate the net present value (NPV) of the investment. Using a financial calculator or spreadsheet software, we can calculate the NPV as follows:

NPV = -$3,000,000 + ($1,000,000 / 1.12) + ($1,500,000 / 1.122) + ($2,000,000 / 1.123) + (SV / 1.123)

where SV is the salvage value.

Setting NPV to zero and solving for SV, we get:

SV = $514,020

Therefore, the salvage value would need to be at least $514,020 for the investment in the automated equipment to be financially attractive.

(Ignore Income Taxes in This Problem