(Ignore income taxes in this problem.) The management of Kobler Corporation is investigating an investment in equipment that would have a useful life of 5 years. The company uses a discount rate of 10% in its capital budgeting. Good estimates are available for the initial investment and the annual cash operating outflows, but not for the annual cash inflows and the salvage value of the equipment. The net present value of the initial investment and the annual cash outflows is -$235,421.
-Ignoring the cash inflows, 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

The net present value (NPV) of the investment is -$235,421, which means the present value of cash inflows needs to be at least $235,421 to make the NPV zero. The salvage value must be discounted back to present value using the 10% discount rate over 5 years. The present value factor for 5 years at 10% is approximately 0.6209. Therefore, the salvage value needed is $235,421 / 0.6209 = $379,100.

(Ignore Income Taxes in This Problem