I am experiencing some confusion about Salvage value and Book value when studying Corporate issuers - Capital Budgeting - Replacement project analysis topic.

I came across a practice question, and here is the context that is giving me problems: “It is estimated that the new equipment can be sold for $4000 at the end of five years; this is its estimated salvage value.”

Formula: TNOCF = (SalTNew – SalTOld) + NWCInv – T[(SalTNew – BTNew) – (SalTOld – BTOld)],

To calculate profit on the salvage of new: SalTNew – BTNew

The solution arrives at 4000-0(Book value)=4000, where book value is 0. My thinking is Book value equals 4000, salvage value, hence zero profit. My rationale is over the useful life of an asset, the book value of an asset should depreciate to its salvage value? Isn’t it the case that under Straight Line Depreciation or DDB, the machine’s book value at the end of its useful life is the same as the salvage value; The depreciation method stops when the book value equals salvage value?

I feel like I’m missing something basic here- salvage value versus book value. Please help! Thanks!

Can someone kindly help me? Please…

Even if an asset is depreciated fully, the book value likely won’t equal the salvage value. The book value will equal the estimated salvage value (usually estimated at the time of purchase), but the actual salvage value can be quite different.

If the old machine isn’t replaced, what would the (old) terminal cash flow be (ignoring the working capital investment)?

If the old machine is replaced, what would the (new) terminal cash flow be (ignoring the working capital investment)?

The Book Value of a Fixed Asset after it’s been fully depreciated = 0.

Its Salvage Value is what a company expects to receive when it sells that asset. It is subtracted from the Purchase Price of that asset in order to gauge how much of the installed cost of the asset will be depreciated.

That depends on what, exactly, you mean by “**fully** depreciated”.

Often, “fully depreciated” is used to mean that the accumulated depreciation equals the *depreciable value* (original cost less estimated salvage value). Unless the original (estimated) salvage value was zero, the book value of a “fully depreciated” asset would not be zero; it would be the original (estimated, non-zero) salvage value.