Question

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is this salvage value handled when computing NPV of the project?

Answer 1

Answer:

Cash in-flow in the last year.

Explanation:

Salvage value, also known as residual value, is the amount that you receive from sale of Property, Plant, and Equipment at the end of useful life. When computing the NPV of any project, we consider all the relevant cash flows of that project. Since, $45,000 will be received when project ends from sale of Fixed asset, so this figure will be treated as Cash in-flow and discounted.