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Croce, Inc., is investigating an investment in equipment that would have a useful life of 9...

Croce, Inc., is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 16% in its capital budgeting. The net present value of the investment, excluding the salvage value, is −$578,586. (Ignore income taxes.)

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.

How large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive?

A. $578,586

B. $92,574

C. $3,616,163

D. $2,199,947

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Answer #1

Net present value excluding salvage value = -$578,586

Interest rate (i) = 16%

Time period (n) = 9 year

Salvage value = ?

Since Net present value of the investment is -$578,586, hence present value of salvage value must be $578,586 to make the investment financially attractive.

Present value of salvage value = Salvage value x PVF (i%, n)

578,586 = Salvage value x PVF (16%, 9)

578,586 = Salvage value x 0.263

Salvge value = 578,586/0.263

= $2,199,947

Correct option is (D)

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