Question

A company is deciding whether to lease or buy a new truck. The truck can be purchased for $50,000. The salvage value in 8 years is expected to be $3,000. The company's marginal tax rate is 43%, cost of debt is 15%, and its WACC is 26%. Calculate the PV of Salvage.

Answer 1

The PV of Salvage is $736.67. The present value of the salvage value of a truck after 8 years can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value of the salvage, r is the discount rate, and n is the number of periods until the future value is received. In this case, we'd use the cost of debt as the discount rate.

Step-by-step explanation:

The present value (PV) of salvage is the current worth of the expected salvage value of the truck at the end of its useful life. To calculate the PV of Salvage, you need to discount the future salvage value to its present value. In this case, the salvage value in 8 years is expected to be $3,000. To discount this amount, you can use the formula: PV = Salvage Value / (1 + r)^n, where r is the discount rate and n is the number of years. In this case, the discount rate is the company's weighted average cost of capital (WACC) of 26%.

Using the formula, PV = 3000 / (1 + 0.26)^8 = $736.67.