A company has some equipment that they know will be

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

Hey Anna!

This question is testing your knowledge of discounting (opposite of compounding but same idea). We no the future value of the asset upon disposal will be $5,000. The problem also gives us the interest rate, or discount rate, we will use to determine the NPV of the asset at disposal.

Future Value: $5,000

Discount Rate: 5% or 0.05

Year 5: $5,000

Year 4: $5,000 / 1.05 = $4,761.90

Year 3: $4,761.90 / 1.05 = $4,535.15

Year 2: $4,535.15 / 1.05 = $4,319.19

Year 1: $4,319.19 / 1.05 = $4,113.51

NPV: $4,113.51 / 1.05 = $3,917.63

You can also solve this using exponents: NPV = $5,000 / (1.05^5) = $3,917.63