Question

Ten years ago, Jacobson Recovery purchased a wrecker for $285,000 to move disabled 18-wheelers. He anticipated a salvage value of $50,000 10 years after the initial purchase. During this time his average annual revenue totaled $52,000. (a) Was his investment economically justified at a 12% discount rate

Answer 1

NPV = $24,910.26

The investment is economically justified because it increases the wealth pg Jacobson Recovery by $24,910.26

Step-by-step explanation:

To determine whether the investment is justifiable we will compute the the Net present Value of the project

The Net present value (NPV) is the difference between the Present value (PV) of cash inflows and the PV of cash outflows. A positive NPV implies a good and profitable investment project and a negative figure implies the opposite.

NPV = PV of cash inflows - PV of cash outflows

PV of cash average revenue = A × (1-(1+r)^(-n))/r

A- average revenue, r- discount ate- 12% , n- number of years- 10

PV of reveue = 52,000 × (1-(1.12)^(-10)/0.12= $293,811.60

PV of salvage value = F × (1+r)^(-n)

= 50,000 × 1.12^(-10)

= 16,098.66183

NPV = $293,811.60 + 16,098.66183 - $285,000

= $24,910.26