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What is the Internal Rate of Return (IRR)? What is the discounted payback period? What cash flows are relevant in capital budgeting? What is capital rationing? What is a discount factor and how is it used? What is an annuity and how does an annuity factor simplify appraisal? How does inflation affect capital budgeting, and how is it handled? How does working capital investment feature in project appraisal? What is sensitivity analysis in capital budgeting and how is it interpreted? Why is NPV considered superior to payback and ARR?
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What is the role of residual (terminal) value in appraisal?

Intermediate

Answer

Residual or terminal value is the estimated cash the project generates at the end of its life—from selling assets or the ongoing value of the business. It's a cash inflow in the final period, discounted to present value, and can be significant for long-lived projects. Overestimating it can flatter NPV, so it's estimated carefully.
Real-world example A machine's expected scrap value at year 5 is included as a discounted inflow in the appraisal.

Common follow-ups: When is terminal value significant? | Why estimate it carefully?

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All 34 Capital Budgeting questions