Because salvage value is a more risky estimate than others in lease analysis, one might do one of the following:
A)ignore salvage in one's calculations.
B)use a higher, risk-adjusted discount rate for salvage value estimates.
C)reduce the salvage value by half to account for risk.
D)arrange to sell the asset ahead of time.

Question

Quizplus · Accepted Answer

Ignoring salvage value in lease analysis is not recommended as it can significantly impact overall lease costs. Reducing the salvage value by half may not accurately reflect the actual value of the asset at the end of the lease. Arranging to sell the asset ahead of time is not always feasible. Therefore, using a higher, risk-adjusted discount rate for salvage value estimates is the best choice to account for the risk involved in this estimate.

Because Salvage Value Is a More Risky Estimate Than Others