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?

Answer 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

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