Valuation MCQ with answer and solution

Concept

Scrap value vs salvage value in engineering depreciation

Formula

Scrap Value = Raw material resale value - Dismantling cost

Step-by-step solution

1. In engineering economics and depreciation, an asset at the end of its useful lifespan possesses residual value. 2. Salvage value applies when the equipment is sold intact as second-hand equipment for continued utility. 3. Scrap value applies when the asset is broken up and sold solely for its basic material content (metal, scrap parts). 4. Hence, scrap value is the estimated value of an asset at the end of its useful life if sold for its basic material content. Answer: C

Explanation

Scrap value (junk value) represents the net estimated monetary recovery obtained from the sale of an asset's basic constituent materials (such as scrap steel, timber, or crushed concrete) after it has reached the end of its physical/useful life and is dismantled or demolished, net of dismantling expenses. In contrast, salvage value refers to sale without dismantling.

Why the other options are wrong

A) Describes salvage value, where the machine is sold intact as second-hand operating equipment. B) Represents market value, which fluctuates throughout the machine's life based on supply and demand. D) Represents book value (Written Down Value), not scrap value.

Shortcut

Scrap value = Dismantled raw material value; Salvage value = Usable second-hand equipment value.

Common mistake

Confusing scrap value with salvage value; scrap value is the value after dismantling for basic material content, whereas salvage value is the value as usable second-hand equipment without dismantling.