Abstract
AbstractManufacturers are faced with three options for disposing of excess finished items: they can (1) continue to mark down the item until it sells; (2) dispose of or scrap it; or (3) salvage it in order to reclaim valuable raw materials and components. In many situations the option of a markdown is not viable, thus the choice is to either scrap or salvage. Although many manufacturers have invested in salvage equipment, they have not deduced the impact of this investment as it affects not only the risk‐adjusted value of the project but also the production run size and the selling price. Hence, their decisions frequently turn out to be suboptimal. This paper develops a project‐valuation model that adds a new dimension to traditional capital budgeting decisions by incorporating salvage capacity.
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