Question

Jojola Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 5 years. The company uses a discount rate of 13% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is –$439,238. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft. (Ignore income taxes.)

See separate Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

Ignoring the annual benefit, to the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?

A)

$808,910

B)

$439,238

C)

$57,101

D)	$3,378,754

Answer 1

Answer:- A) $808,910

Reason:- Given in the question, net present value of the initial investment and the annual operating cash cost is ($439,238). Any project will be profitable for the business only if the net present value of its future cash inflows is greater than its net present value of its cash outflows. The future cash inflows include annual benefit and salvage value. The question has asked us to ignore annual benefits. So present value of salvage value should be greater than $439,238.

Let salvage value be "Z"

Discount rate = 13%

Discounting factor for 5th year @13% = 0.543

Present value of salvage value = Z x 0.543

So Z x 0.543 = > $439,238

Z = $439,238 / 0.543

Z = $808,910