Question

In at least 200 words answer the following:

The concept of residual or disposal value is an important factor to consider when completing an analysis. Develope a viewpoint on whether residual or salvage values should be included in the analysis. and if so do they distort the final outcome of the capital expenditure analysis?

Answer 1

Capital analysis of an asset is its analysis of future wheather the asset is going to perform well or not. This analysis must include the residual or disposal value.

Residual value : is the value of an asset which is left behind after the useful life of an asset. This is the value which we get after the disposal of an asset.

Now, it can be said that, the concept of residual or disposal value is an important factor to consider when completing an analysis. This is because such analysis is greatly affected by the residual/disposal value which is left behind as this value affects the depreciation rate and amount throughout the life of an asset. According to depreciation expenses, the provisions for depreciation is made in financial statements

Residual value is also considered important while doing an analysis because this distorts the final outcome of capital expenditure analysis and according to capital expenditure analysis only the company/organisation makes their investments in assets.

Another thing about capital expenditure analysis is that it helps us in determining the future potential of any project/investmemt. This is also sometimes known as capital budgeting. It also helps us in determining the NPV (net present value)of the investment (an analysis of incoming and outgoing cash flows) which we are going to make and in determining NPV the salvage value/residual value is considered to be important.

If the residual or salvage values not considered in an analysis, they are likely to distort the final outcome of the capital expenditure analysis as sometimes such values (salvage or residual) are of considerable amount and if ignored, could greatly affect the outcome of such analysis.

So, it can only be said that the concept of residual or disposal value is an important factor to consider when completing an analysis. And yes, the residual or salvage values should be included in the analysis. and they do they distort the final outcome of the capital expenditure analysis.