[Anonymous]

Can someone explain why you would not subtract the salvage value from the base cost of the investment in computing annual depreciation?

For example, a company purchases a new machine for $456,000 with a 5 year life and estimated salvage value of $7,000.

The annual depreciation amount is $91,200 ($456,000/5 years). My intuition is that the annual depreciation would be $89,800 ($456,000 -$7,000)/5.

Is ignored because salvage value is ignored in computing depreciation for tax purposes?

[musicamor]

For purposes of capital budgeting and ROI-type analyses, salvage value is considered a cash inflow at the end of the ROI period. It appears that the examiner is asking you to answer the depreciation question for capital budgeting purposes as opposed to accrual accounting purposes. Under accrual accounting, yes, the salvage value is taken into account since you will have $7k at the end of the asset's useful life.

Texas CPA - licensed in 2012!!!

[Author]

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