(Ignore income taxes in this problem) Boe Corporation is investigating buying a small used aircraft for the use of its executives.The aircraft would have a useful life of 9 years.The company uses a discount rate of 10% in its capital budgeting.The net present value of the investment, excluding the salvage value of the aircraft, is -$439,527.Management is having difficulty estimating the salvage value of the aircraft.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) $439,527
B) $43,953
C) $4,395,270
D) $1,036,620

Question

Maria Brigetha · Accepted Answer

Final Answer : D, Explanation :  To make the investment financially attractive, the net present value (NPV) should be positive. This means that the present value of the cash inflows from the investment should be greater than the present value of the cash outflows, which include the initial purchase price and any maintenance or operating costs. The salvage value is the amount of cash inflow that the company expects to receive from selling the aircraft at the end of its useful life.To find the salvage value that would make the investment financially attractive, we need to add the salvage value to the NPV and solve for the new NPV that equals zero:NPV + Salvage Value = 0.Solving for Salvage Value, we get:Salvage Value = -NPV.Substituting the given values:Salvage Value = -$439,527.Therefore, the salvage value would have to be $1,036,620 to make the investment financially attractive.(D) is the correct answer. Minimum salvage value = Negative net present value to the offset ÷ Present value factor= $439,527 ÷ 0.424 = $1,036,620

Definitions

Learning Objectives

Learning Objectives

Related questions