Question

Altman Corporation is considering investing $75,000 in a new piece of machinery that will generate net annual cash flows of $25,000 each year for the next 5 years. The machine has a salvage value of $8,000 at the end of its 5 year useful life. Altman's cost of capital and discount rate is 9%. Which of the following tables and criteria should we use to discount the salvage value of the equipment?

a. PV of a single sum table, n=5, i=9%
b. PV of annuity table, n=5, i=9%
c. PV of a single sum table, n=1, i=9%
d. PV of annuity table, n=1, i=9%

Answer 1

a. PV of a single sum table, n=5, i=9%

Step-by-step explanation:

The value n determines the number of years annual cash flow is generated. As in this case it is 5 years, therefore n = 5.

The value i determines the rate at which the future value will be discounted to calculate present value of the cash flows. Therefore, in this case i = 9%.

Finally, we are asked to identify which table will be used to discount the salvage value of the equipment. Since we need to determine the discount value at year 5, therefore, the PV of a single sum table will be used.

Hence, the answer is a. PV of a single sum table, n=5, i=9%.