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Hello sir,
Assuming that I purchased a new machine costing $12,000 and with a useful life of 6 years. If the new machine is being depreciated using a straight line method to zero salvage value at the end of its useful life, and I have decided to sale it, let say at the price of $6,000 after its useful life. How should $ 6, 000 be treated when calculating NPV and initial investment???The 6,000 does not affect the initial investment at all. There is an outflow of 12,000 at time 0 and an inflow of 6,000 at time 6.
As far as depreciation is concerned, financial accounts depreciation is irrelevant. Tax allowable depreciation (capital allowances) is relevant (because of the tax saving that results). Questions always state how the TAD is to be calculated (usually it is reducing balance) and in the year of sale there is a balancing charge or allowance.
This is all explained, with examples, in my free lectures on investment appraisal with tax.
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