Residual value

Definition

Residual value, also known as salvage value or scrap value, is a financial term used in various contexts, particularly in asset management and finance.

What is a residual value?

A residual value refers to the estimated value of an asset at the end of its useful life or a specific period. 

There are different methods used to estimate residual value, depending on the type of asset and industry. Common methods include straight-line depreciation, declining balance depreciation, and sum-of-years-digits depreciation.

Residual value is essential for financial planning and budgeting. It helps businesses and individuals estimate the total cost of owning an asset over its useful life.

Accurately estimating the residual value of an asset is crucial for businesses to mitigate financial risks associated with asset ownership, such as potential losses in case of asset disposal.

Example of residual value

Let’s say you purchase a car for $30,000. After three years of use, the car’s estimated residual value is $15,000. This means that after three years, the car is expected to retain $15,000 worth of value. So, if you were to sell the car after three years, its value would be $15,000.