A company has some equipment that they know will be obsolete in five years.

Question

A company has some equipment that they know will be obsolete in five years. They expect, though, that it will have some recycling value, and the purchasing department (which handles disposals) thinks they’ll be able to get about $5,000 for it at that point. If interest rates are expected to average around 5% over that time period, what is the recycling value of the equipment in today’s dollars?

Answer 1

Since the recycling happens 5 years from today, we need to discount the value received at that time back to today's dollars. To do this, we us the formula: PV = Cash Flow / (1+interest rate)^Periods.

Filling the known information into the formula, we get PV = $5,000 / (1+0.05)⁵ = $3,917.63. This is how much the $5,000 is worth today.