Question

What is the effect on NPV of an asset if the salvage value is ignored?A)NPV would be understated. B)No effect C)NPV would be overstated. D)It depends on the cost of the asset being considered for investment.

Answer 1

Answer:

The correct answer is A)NPV would be understated.

Explanation:

NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

The Salvage value is added at the end of the cash flow. So is a cash inflow.  

And if we ignore salvage value the difference, the cash inflows will be smaller,  so the NPV would be understated.