Salvage value

Definition

Salvage value, also known as residual value or scrap value, is the estimated monetary worth of an asset at the end of its useful life. 

What is salvage value?

Salvage value represents the amount that an asset is expected to be worth after it has been fully depreciated or used up. Salvage value is an important concept in accounting, finance, and asset management, influencing decisions related to depreciation, asset valuation, and overall financial planning.

In the context of depreciation, salvage value is a key component in calculating the depreciation expense of an asset. The formula commonly used is straight-line depreciation:

Depreciation expense = (Cost of asset − Salvage value) / Useful life

Some assets may have a salvage value of zero, indicating that they are expected to have no residual worth after being fully depreciated.

In the case of damaged or totaled assets, the salvage value may be considered in insurance claims to determine the overall loss or value of the asset.

Residual value vs. scrap Value: While salvage value, residual value, and scrap value are often used similarly, there can be nuances. Residual value may imply some remaining usefulness, while scrap value specifically refers to the value obtained by selling the materials as scrap.

Example of salvage value

ABC Manufacturing Company purchased a specialised machine for ₦50,000, with an estimated useful life of 10 years. The salvage value is estimated to be ₦10,000.

Using straight-line depreciation, the annual depreciation expense would be 

₦50,000 / 10 years = ₦5,000  per year.

The annual depreciation expense is then subtracted from the initial cost to determine the book value over the years.

Year 1 book value = ₦50,000 – ₦5,000 = ₦45,000

Year 2 book value = ₦45,000 – ₦5,000 = ₦40,000

… (and so on)

In the 10th year, the book value will be ₦50,000 – (9 x ₦5,000) = ₦5,000.

In this example, the salvage value of ₦10,000 represents the anticipated residual worth of the machinery after 10 years of use.