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 would result in an incomplete analysis. Reducing the salvage value by half is arbitrary and not based on any data or analysis. Arranging to sell the asset ahead of time is not always possible. Therefore, using a higher, risk-adjusted discount rate for salvage value estimates is the best choice as it takes into account the uncertainty and risk associated with salvage value estimates.

Because Salvage Value Is a More Risky Estimate Than Others