Question

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the period ends, those assets are expected to have an after-tax salvage value of $45,000.
How is the $45,000 salvage value handled when computing the net present value of the project?

a) reduction in the cash outflow at time zero
b) cash inflow in the final year of the project
c) cash inflow for the year following the final year of the project
d) cash inflow prorated over the life of the project
e) not included in the net present value

Answer 1

Answer:

b) cash inflow in the final year of the project

Explanation:

Aftertax salvage value is the net proceeds from the sale or disposal of fixed assets like Plant and Equipment (PPE) at the end of the project. The amount of money received is an income and therefore, tax must be paid on it and the company keeps the rest.

The after tax salvage value of a fixed asset used in a project , is included in the NPV calculation . It is a terminal cashflow and is part of the project since the assets being sold are used in production of the items that Rossiter Restaurants sell. However, it is important to note that you will use the PV of the after tax salvage value with the PV of other cash inflows and initial investment amount to find the NPV of the project.