Machine A has 3-year life with no salvage value. Assume that there were told tha

Question

Machine A has 3-year life with no salvage value. Assume that there were told that the service provided by these machines would be needed for only 5 years. Alternative A would have to be repurchased and kept for only 2 years. What would its salvage value have to be after the 2 years in order to make its annual worth the same as it is for its 3-year life cycle at an interest rate of 10% per year?

Year Alternative A, $ Alternative B, $

0 -10,000 -20,000

1 -7,000 -5,000

2 -7,000 -5,000

3 -7,000 -5,000

4 -5,000

5 -5,000

Explanation / Answer

the salvage value would be the difference in NPV's calculated for 3 years life span and 2 years life span

The difference is 5,259 which is the salvage value.

Year cash flows PV of cashflows 0                  (10,000)       (10,000) 1                       7,000            6,364 2                       7,000            5,785 3                       7,000            5,259 NPV @ 3 years            7,408

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