Terminal cash flows
Salvage value
Salvage value (SV) is the most common example of terminal cash flows. Salvage value may be defined as the market price of an investment at the time of its sale. The cash proceeds net of taxes from the sale of the assets will be treated as cash inflows in the terminal (last) year. As per the existing tax laws in India, no immediate tax liability (or tax savings) will arise on the sale of an asset because the value of the asset sold is adjusted in the depreciable bases of assets.
The effects of the salvage values of existing and new assets may be summarized as follows:
• Salvage value of the new asset it will increase cash inflows in the terminal (last) period of the new investment.
• Salvage value of the existing asset now it will reduce the initial cash outlay of the new asset.
• Salvage value of the existing asset at the end of its normal life it will reduce the cash flow of the new investment of in the period in which the existing asset is sold.