Question

A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000 when the project ends. Operating expenses are expected to be $75,000 in the first year and are expected to increase 3% per year over the life of the project. The appropriate discount rate is 8%, the company’s tax rate is 20%, and the CCA rate is 30%. What amount would you use for salvage value in your NPV calculation? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.)

Answer 1

At the end of five years, the machine would have been completely depreciated (30% in each of first 3 years & remaining in 4th year). So the remaining book value will be 0.

Thus the salvage value will be equal to the market worth of machine after 5 years which is 50,000.00

It's contribution to NPV will be as shown below: