Problem - 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 .......... 20% of original cost of the equipment
Repair in 4 years ................. $11,000
Cost of capital ................... 10%
Life of project ................... 6 years
If the new piece of equipment is purchased then the equipment currently being used can be sold at the time of purchase of the new equipment for $7,000.
The net present value of this investment was calculated to be -$28,730.
Calculate the salvage value for this piece of equipment. Ignore income tax effects. Use present value factors attached.