(Ignore income taxes in this problem) Buse Corporation is investigating buying a

Question

(Ignore income taxes in this problem) Buse Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 8 years. The company uses a discount rate of 14% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is -$488,487. 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?

Select one: a. $488,487 b. $68,388 c. $1,391,701 d. $3,489,193

Explanation / Answer

PV of $1, N 8, R 14% = 0.3506

Salvage value should be more than 488,487 / 0.3506 = $1,393,288

The salvage value of the aircraft would be $3,489,193 to make the investment in the aircraft financially attractive

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