Frequently Asked Questions

Some students have had doubts regarding the calculation of the salvage value of an asset. The salvage value formula is as follows:
Salvage value = Sale price of asset - (t x Gain on Sale)
Which gives the value net of taxes that the firm will receive by disposing the asset. When there is a loss on the sale of an asset, the company has the right to pay a lower tax (it works as a subsidy), and so the tax amount should be added to the sales value.

The Gain on Sale is the taxable amount from the sale.
Gain on Sale = Sale price - Book Value of the asset (at the time of the sale).

Note: Refer to slide 6 of the in-classroom lectures for further details.