Question

XYZ Company is considering the purchase of a new piece of equipment and
has gathered  the following information about the purchase:

Initial investment ................    ?
Annual cost savings ...............  $20,000
Salvage value in 6 years ..........  30% of original cost of the equipment
Repair in 4 years .................  $21,000
Cost of capital ...................     10%
Life of project ...................    6 years

The net present value of this investment was calculated to be $22,924.

Calculate the salvage value for this piece of equipment. Ignore income
tax effects.

You will need to use the present value table factors posted in carmen to
answer this question. To access these factors, click modules and then
scroll to the capital budgeting topic. Click on the link labeled present
value table factors. No credit will be awarded for this question using a
means other than these table factors to answer this question.

Answer 1

NPV = Net cash outflow - Net cash inflow or Net cash savings

Repairs in 4 years is to be ignored as it is not part of capital budgeting decision , it will be expensed in P and L.

Net cash saving at PV+ Residual Cost + NPV = Cost of equipment

Let cost of equipment be X

Net cash savings at PV = Annual cash savings * PVIFA (10% for 6 years) = 20000* 4.3553 = 87106

Residual cost at PV = 0.30X * 0.564 (PV factor 10% , 6th year) = 0.169 X

Now ,

87106 + 0.169 X + 22924 = X

Solving X ,

X = 132406

So salvage value = 30% of 132406 = 39722