Capital salvage factor

The capital salvage factor (CSF) is the salvage-side companion to the CTF. CTF baked in the infinite-life assumption (tax shields run forever), but the asset gets sold or scrapped at some point, which ends the tax-shield stream. CSF corrects for this. It’s the multiplier on the salvage value that accounts for the loss of future tax shields once the asset is disposed of.

The formula:

$\text{CSF}=1-\frac{t\cdot d}{i+d}$

where $t$ is the corporate tax rate, $d$ is the CCA rate, and $i$ is the after-tax MARR. CSF is less than 1: the present-worth-adjusted salvage value is less than the nominal salvage because realising the salvage cuts off future CCA deductions.

Notice CSF doesn’t carry the half-year-rule correction that CTF has. By the time the asset is sold it’s been in the pool for many years; the half-year wrinkle was about the first year only.

CSF also rests on a simplifying assumption: no tax implications from capital gains or losses on disposal. In reality, if the salvage exceeds UCC the difference is recaptured as taxable income (or in extreme cases taxed as a capital gain). The formula ignores this and assumes the salvage flows back into the UCC pool with no additional tax event.

If the salvage value is zero (asset scrapped for free at end-of-life), CSF doesn’t matter: zero times anything is zero, so the salvage drops out of the analysis entirely.

A worked example. Same parameters as the CTF example (Class 8, $d=20\%$, $i=8\%$, $t=27\%$), with a $10,000 salvage at year 10:

$\text{CSF}=1-\frac{0.27\cdot 0.20}{0.08+0.20}=1-0.1929=\mathrm{0.8071.}$

The PW-effective salvage value (before discounting to time 0) is 10{,}000 \cdot 0.8071 = \8{,}071$.Thendiscountthattoyear0using$(P/F, 8%, 10) = 0.4632$:

$P{W}_{\text{salvage}}=8,071\cdot 0.4632=\$3,739.$

Complete after-tax PW formula

Putting CTF and CSF together, the after-tax PW of a project with first cost $P$, salvage $S$ at year $N$, and annual after-tax operating savings $A$ is approximately:

$P{W}_{\text{after-tax}}=-P\cdot \text{CTF}+A(1-t)\cdot (P/A,i,N)+S\cdot \text{CSF}\cdot (P/F,i,N)$

The three terms:

1. First cost, multiplied by CTF to subtract the tax shield’s PW.
2. Operating cash flows, multiplied by $(1-t)$ to convert pre-tax to after-tax, discounted as an annuity.
3. Salvage, multiplied by CSF to subtract the foregone-future-shield PW, discounted to time 0.

See Capital tax factor for the companion factor.