A project in Malaysia costs $5,000,000

Finance Mar 08, 2021

A project in Malaysia costs $5,000,000. Over the next 4 years, the project will generate total operating cash flows of $4,700,000, measured in today's dollars using a required rate of return of 12 percent. (1) Calculate the break-even salvage value of this project? (2) Should the company go ahead with the project? Why or why not?

Expert Solution

Computation of Break-even Salvage Value of the Project:

At Breakeven Point
Present Value of Cash Outflows = Present Value of Cash Inflows
Costs of Project = PV of operating cash flows + PV of Salvage Value
$5,000,000 = $4,700,000 + PV of Salvage Value
$300,000 = PV of Salvage Value
Salvage Value = 300,000/.6355 = $472,055.81

Time	PVF
1	0.8929
2	0.7972
3	0.7118
4	0.6355

1) Salvage Value of the Project is $472,055.81

2) As salvage Value is positive. The company should go ahead with project.

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