(Ignore income taxes in this problem.) The management of Gimenez Corporation is

Question

(Ignore income taxes in this problem.) The management of Gimenez Corporation is investigating an investment in equipment that would have a useful life of 7 years. The company uses a discount rate of 17% 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 -$274,265. 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?

Explanation / Answer

The machine has useful life of 7 years. Let salvage value be x. now The net present value of the initial investment and the annual cash outflows is -$274,265. hence present value of (salvage value + net inflow ) should be atleast $274,265. hence (P/F ,17% , 7) = 1 / (1+0.17)^7 hence salvage value must be atleast F = $274,265. / (1+0.17)^7 = 91383.83023 rounded to whole dollor = $ 91384

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