Doubt Regarding Treatment Of Scrap Value in NPV Calculation

Bacher Co is considering investing $500,000 in equipment to produce a
new type of ball. Sales of the product are expected to continue for three
years, at the end of which the equipment will have a scrap value of
$80,000. Sales revenue of $600,000 per year will be generated at a
variable cost of $350,000. Annual fixed costs will increase by $40,000

(a) Determine whether, on the basis of the estimates given, the
project should be undertaken, assuming that all cash flows
occur at annual intervals and that Bacher Co has a cost of
capital of 15%.:

Solution:NPV calculation
Time Cash flow 15% DF PV
$000 $000
0 Equipment (500) 1 (500)
1–3 Revenue 600 2.283 1,370
1–3 Variable costs (350) 2.283 (799)
1–3 Fixed costs (40) 2.283 (91)
3 Scrap value 80 0.658 53
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NPV 33
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When Scrap Value is given, but no sale is mentioned, Is it a rule to take it as cash inflow?