Question

You can buy a machine at $ 100,000 that will produce a net income, after operating expenses, of $ 20,000 the first year, increasing this net income by $ 1,000 per year. If you plan to have the machine for five years, what should the market value (of resale) be at the end of 5 years for the investment to be justified? You must obtain a return of 15% on your investment. Draw flow diagram

Answer 1

Let salvage value be S

initial cost = 100000

Annual income = 20000 increasing at 1000 per year

t = 5 yrs

i = 15%

PW = -100000 + 20000*(P/A,15%,5) + 1000*(P/G,15%,5) + S*(P/F,15%,5)

PW = -100000 + 20000*3.352155 + 1000*5.775142 + S*0.497176

PW = -27181.755 + S*0.497176

Lowest possible Salvage value for investment to be justified

S*0.497176 = 27181.755

S = 54672.22

Cash Flow diagram