What is salvage value?

What is salvage value?

• A. The annual depreciation expense
• B. The net present value of the project at startup
• C. The fixed capital investment of the plant, minus the land value, evaluated at the end of the plant life
• D. The anticipated cash inflows from operations

Answer: (C)

Salvage value is the amount you expect to receive from selling the fixed assets (machinery and equipment) at the end of the plant’s life, excluding land. It’s the remaining value of the fixed capital assets when the project ends and is treated as a terminal cash inflow in capital budgeting. The statement that salvage value equals the fixed capital investment of the plant minus the land value, evaluated at the end of the plant life, captures this idea: it’s the resale value of the non-land fixed assets after depreciation, realized at retirement. By contrast, depreciation expense is a noncash accounting charge, net present value at startup is the project’s overall present value, and anticipated cash inflows from operations are the ongoing operating cash flows, not the asset sale value.

Salvage value is the amount you expect to receive from selling the fixed assets (machinery and equipment) at the end of the plant’s life, excluding land. It’s the remaining value of the fixed capital assets when the project ends and is treated as a terminal cash inflow in capital budgeting. The statement that salvage value equals the fixed capital investment of the plant minus the land value, evaluated at the end of the plant life, captures this idea: it’s the resale value of the non-land fixed assets after depreciation, realized at retirement. By contrast, depreciation expense is a noncash accounting charge, net present value at startup is the project’s overall present value, and anticipated cash inflows from operations are the ongoing operating cash flows, not the asset sale value.