according to definitions, book value should not fall below the salvage value does it mean in capital budgeting project calculation: TNOCF = SAL + NWCINv - T(Sal - B) The (Sal - B) wil always yield a negative number?
no…only when the asset is sold at a loss…when the sales proceeds received are less than the book value…SAL-B will be negative…
think of Sal as the selling price at the end of the project. So you sell it for more than the book value if (Sal-B) is positive, and then you subtract the taxes due on the sale. If you sell it for less than book (Sal-B) is negative, then you get the tax credit on the amount. make sense?
Salvage value = what can you get if you sell the asset today? Salvage value can be more than book value.
thanks guys
I was just reviewing this tonight. When I hit the terminal year CF equation I thought for a second I had somehow flipped back to taxes in PM. The formulas seem very similar: TNOCF = (Sal)*(1-T) +NWCInv + T*B (B=book val) FVIF(cg) = (1+r)^t*(1-Tcg)+Tcg*B (B = basis) Maybe I’ve just been staring at this too much…