Salvage value is typically treated in project evaluation as what?

Salvage value is typically treated in project evaluation as what?

• A. A terminal cash inflow
• B. A depreciation expense
• C. A tax credit
• D. A recurring maintenance cost

Answer: (A)

Salvage value is a one-time terminal cash inflow you receive when you dispose of the asset at the end of the project. In evaluating a project with NPV or IRR, you include these end-of-life proceeds as the final cash flow because they are actual money entering the project at shutdown. It isn’t a depreciation expense—depreciation is a noncash charge allocated over the asset’s life and doesn’t by itself provide cash. It isn’t a tax credit, which would directly reduce taxes; salvage interacts with taxes through gains or losses on disposal, yielding an after-tax cash flow rather than a credit. It isn’t a recurring maintenance cost, which would affect yearly operating cash flows. If applicable, consider that taxes may apply if the sale price differs from the asset’s book value, so the after-tax salvage value should be included in the final period.

Salvage value is a one-time terminal cash inflow you receive when you dispose of the asset at the end of the project. In evaluating a project with NPV or IRR, you include these end-of-life proceeds as the final cash flow because they are actual money entering the project at shutdown. It isn’t a depreciation expense—depreciation is a noncash charge allocated over the asset’s life and doesn’t by itself provide cash. It isn’t a tax credit, which would directly reduce taxes; salvage interacts with taxes through gains or losses on disposal, yielding an after-tax cash flow rather than a credit. It isn’t a recurring maintenance cost, which would affect yearly operating cash flows. If applicable, consider that taxes may apply if the sale price differs from the asset’s book value, so the after-tax salvage value should be included in the final period.