The residual value of any investment is the scrap value of any plant etc. at the end of its life. This does not reduce the cost of a project, it simply gives another cash inflow in the year when the item is sold.
What effect does a residual value have on our tests?
- Payback period - none at all, since the money comes after the payback point.
- Average rate of return - will increase the 'gain' and hence the 'net gain'. The return will increase if the number of years is not adjusted.
- NPV - little change, unless the residual value is very high. Discount factor will be low since the money only comes in after the project is over.