Explain the concept of salvage value and how it is considered in capital budgeting analysis.

Explain the concept of salvage value and how it is considered in capital budgeting analysis.

Salvage value refers to the estimated residual value of an asset at the end of its useful life. In capital budgeting analysis, salvage value is considered as it affects the cash flows associated with the investment decision. When evaluating a capital project, the salvage value is subtracted from the initial investment to determine the net investment. Additionally, the salvage value is included in the cash inflows at the end of the project's life. By considering the salvage value, capital budgeting analysis accounts for the potential value that can be recovered from the asset at the end of its useful life, thus providing a more accurate assessment of the project's profitability and viability.