Exercise / Step 4.2 : Capacity residual value
How to calculate the residual value of an asset.
During Step 4.1, you learned how to evaluate the base case.
Now, we consider that the machine might be sold at a certain price at the end of year 8, when the project is over. As the figure is not guaranteed at all, the accounting department decides to fully depreciate the machine over its expected life, i.e. 8 years.
As the machine is fully depreciated, the price at which it is sold will generate a capital gain which will be taxed.
The after-tax selling price of the machine will be added to the 8th cash in-flow and (modestly) increment the NPV and IRR.
Selling price of the machine $200,000
Capital gain tax rate 20%
Work on the frame spreadsheet.
