Confused in using the salvage value in Rate of Return.

Question

I am trying to solve a rate of return question from the book Engineering Economics by R. Paneerselvam. In that particular problem I am given a salvage value along with other factors. Following are the factors:

i) Initial cost

ii) Annual incremental revenue

iii) Life

iv) Life-end Salvage value (Rs.)

Now when salvage value is not given we use the following formula:

$PW_n(i) = -P + A(P/A,i,n)$

Now how will this formula be modified when salvage value is also added? I mean what factor will be introduced alongside the Salvage value?

I´ve noticed that I didn´t discounted the sum of the annuities. I´ve made an edit of my answer. — callculus42, Jul 04 '19 at 15:16

callculus42 · Accepted Answer · 2019-07-04T15:15:06.880

1

To obtain the present value of the salvage value ($S$) you discount the value of the salvage $n$ times. Therefore the whole formula is

$$PV_n(i)=-P+A\cdot \frac{(1+i)^n-1}{i\cdot (1+i)^n}+\frac{S}{(1+i)^n}$$

edited Jul 04 '19 at 15:15

answered Jul 04 '19 at 11:40

callculus42

30,550

won't we use S(F/P) instead of S(P/F)? – Muhammad Ahmad Jul 04 '19 at 22:10
1

I don´t know the meaning of S(F/P) or S(P/F). It would be nice if you show what formula it is. Beside this, I´m 100% sure that the Formula I´ve written is right. It is the present value if you have initial cost, n annuities and a salvage. – callculus42 Jul 04 '19 at 22:51
1

the one you used in the formula is P/F. $S(F/P) = S(1+i)^n$ – Muhammad Ahmad Jul 04 '19 at 22:54
@AhmadQayyum We get the salvage value (S) after $n$ periods. To obtain the present value we have to discount it $n$ times. – callculus42 Jul 04 '19 at 22:59

Confused in using the salvage value in Rate of Return.

1 Answers1