Scrap value ............ cash inflow in last year.
Answers
Explanation:
Why should scrap value be added to the end of year cash flow when computing for the net present value?
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It shouldn’t, in most cases. Net present value is the sum of all expected cash flows, each discounted for time and risk (risk being captured in the cost of capital). In most simple NPV analyses, the negative cash flow, aka investment is made today (time zero, so not discounted), while the after-tax cash generated by that investment occurs over time.
There are situations where liquidation value is relevant, but this assumes the firm will not be using that asset any longer (i.e., it won’t be generating any future cash). So, if part of future expectations is selling an asset, then the post-sale cash flow from that asset goes to zero, but the after-tax cash from liquidating/selling the asset would be considered.