Cardinal Company is considering a project that would require a $2,725,000 invest
ID: 2483583 • Letter: C
Question
Cardinal Company is considering a project that would require a $2,725,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $400,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
view link http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG
What is the present value of the equipment’s salvage value at the end of five years? (Use the appropriate table to determine the discount factor(s) and final answer to the nearest dollar amount.)
http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG view link
Cardinal Company is considering a project that would require a $2,725,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $400,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:
Explanation / Answer
3. Annual Net cash inflows = Net operating income + Depreciation = 571000 + 465000 = $1,036,000
Present value of annual net cash inflows = 1,036,000 x PVAF(%, n) = 1,036,000 x PVAF(14%, 5years) = 1,036,000 x 3.4331 = $3,556,671.88
4. Salvage Value = 400,000 x PVF(%, n) = 400,000 x PVF(14%, 5years) = 400,000 x 0.5194 = $207,747.47