Chipps Corporation Uses a Discount Rate of 9% in Its

question 66

Essay

Chipps Corporation uses a discount rate of 9% in its capital budgeting. Management is considering an investment in telecommunications equipment with a useful life of 5 years. Excluding the salvage value of the equipment, the net present value of the investment in the equipment is −$530,985. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.Required:How large would the salvage value of the telecommunications equipment have to be to make the investment in the telecommunications equipment financially attractive?

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Definitions:

Interest Receivable

An accounting term referring to the interest income that has been earned but not yet received in cash.

Interest Revenue

Income earned from lending funds or investing in interest-bearing financial assets.

Retained Earnings

The portion of a company's profit that is held or retained and not paid out as dividends to shareholders, used for reinvestment in the business, to pay debt, or to buy back shares.

Ending Inventory

Represents the value of goods available for sale at the close of an accounting period, calculated by adding purchases to beginning inventory and subtracting cost of goods sold.