Question

Hi, could you explain me what we do with salvage value when it comes to calculating cash flows from assets

Answer 1

Salvage value is estimated value of asset at the end of its useful life.

While calculating cashflows, we add salvage value to last cashflow (since it is the value which will be received at the end of project which the assets are discarded.)

Please note that you must always take care of tax impact on salvage value.

If taxes are applicable on sale of sale, then take tax impact also in cashflow

Tax cost needs to be substracted from last cashflow if there is gain on sale of asset (i.e. if salvage value is more than written down value of asset after depreciation)

Tax saving needs to be added in last cashflow if there is loss on sale of asset (i.e. if salvage value is less than written down value of asset after depreciation)

Thumbs up please if satisfied. Thanks :)

Comment if further doubts in same question