I am pretty sure there is a gap in my knowledge , it would be awesome if you guys could help me out with this .
So the question is as follows :
FITCO is considering the purchase of new equipment. The equipment costs $350,000, and an additional $110,000 is needed to install it. The equipment will be depreciated straight-line to zero over a five-year life. The equipment will generate additional annual revenues of $265,000, and it will have annual cash operating expenses of $83,000. The equipment will be sold for $85,000 after five years. An inventory investment of $73,000 is required during the life of the investment. FITCO is in the 40 percent tax bracket and its cost of capital is 10 percent. What is the project NPV?
And in the solution the calculation of dep. they have calculated it as 460,000/5 … isnt the salvage value a.k.a resale vlaue of the asset after usage? so shouldnt the dep. be (460,000 - 85,000) / 5 ?
Don’t confuse salvage value with liquidation value. As cpk123 says, the asset will be depreciated to zero in straight-line to year 5. So the value of the asset in the books will be 0 at the end of year 5. If you are able to sell it for a positive amount, in this case 85k, is another story. You are indeed making a profit of 85k. If the problem told you nothing about the depreciation to zero, look for a explicit indication about the salvage value.