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venchlu
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Joined: 18 Aug 2009
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Posted: 05 Jan 2010 at 14:55 \| IP Logged

Does the internal rate of return method take into account recognition of the project's salvage value?? Please help me out.

My answer to it is yes, it does . But Wiley CD said NO. I am confused! What u guys think??

Xalina
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Joined: 14 Sep 2009
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Posted: 20 Feb 2010 at 12:53 \| IP Logged

IRR uses payback method which ignores the salvage value. This is the only explanation I can think of. Is there a better reasoning?

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mits07
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Posted: 20 Feb 2010 at 14:58 \| IP Logged

IRR uses Payback Period using Present Value Factor. IRR does take into consideration of Salvage Value. NPV and Discounted Cash Flow also uses salvage value. Only, Payback period ignores Salvage Value.

EAK5455
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Posted: 20 Feb 2010 at 21:07 \| IP Logged

If the salvage value reduces the initial investment outlay, then the salvage value will be considered and will affect the paypback period. If
the salvage value is the terminal value of the project then it is not considered in that it does not reduce the annual cash flow nor the
initial investment outlay.

In other words, if you're considering a project investment where a machine will be replaced, then the salvage value of the old machine will
offset against the cost of the initial investment outlay and thus will reduce the payback period.

If you're considering a project investment where a machine has a terminal value (salvage value at the end of the project investment), then
this salvage value will be ignored for purposes of the payback period.

The underlying premise behind the payback period is in answer the question "how long will it take to recover the money I am currently having
to shell out for this project".

The IRR method considers both salvage value of replaced property and terminal value of proposed property discounted to current value.

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