Salvage Value

Updated on January 3, 2024
Article bySayantan Mukhopadhyay
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is a Salvage Value (Scrap value)?

Salvage value or Scrap Value is the estimated value of an asset after its useful life is over and, therefore, cannot be used for its original purpose. For example, if the machinery of a company has a life of 5 years and at the end of 5 years, its value is only $5000, then $5000 is the salvage value.

Another name for this value is scrap value. And this is a mere estimate only. After ten years, no one knows what a piece of equipment or machinery would cost. The piece of an asset may end up in a junkyard as well.

Salvage Value Example

Let’s take an example to understand this.

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Salvage Value Formula

Salvage Value (S) = P (1 – i)y

Salvage-Value

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For eg:
Source: Salvage Value (wallstreetmojo.com)

Here, P = Original cost of the asset, i = depreciation rateDepreciation RateThe depreciation rate is the percent rate at which an asset depreciates during its estimated useful life. It can also be defined as the percentage of a company's long-term investment in an asset that the firm claims as a tax-deductible expense throughout the asset's useful life.read more, y = number of years.

So, to find out the scrap value, you first need to make sure that the depreciation rate should be determined. Along with that, you also need to know how many years the asset will last (the useful life of the asset)

When a company purchases an asset, first, it calculates the salvage value of the asset. After that, this value is deducted from the total cost of the assets, and then the depreciation is charged on the remaining amount.

Example

Kites Ltd. has bought an asset of $1 million. They figured that the asset’s useful life would be around 20 years. And the depreciation rate on which they will depreciate the asset would be 20%. Find out the salvage value of the asset Kites Ltd. just purchased.

We have been given the asset’s original price in this example, i.e., $1 million. The asset’s useful life is also given, i.e., 20 years, and the depreciation rate is also provided, i.e., 20%.

Salvage value Formula = P (1 – i) y = $1 million (1 – 0.20) 20 = $1 million (0.8) 20 = $11,529.22

What if the Salvage Value of any Asset is Zero?

What if the value of an asset at the end of its useful life is zero? What should one do then?

  • As per the US Income Tax Regulations, while depreciating an asset, you need to assume that the scrap value of the asset would be zero.
  •  If we assume that the scrap value is zero and find that we can get a value at the end of the useful life, we can account for it again for the company instead of estimating it beforehand.
  • As a result, there would be no estimation error in finding out the scrap value, and no one would be able to use this value as an excuse to encourage/support fraudulent practices.

How is Scrap value seen in Cost Accounting?

If you want to learn Cost AccountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more professionally, you may want to look at 14+ video hours of Course on Cost Accounting.

Why is Scrap Value not Reduced to the Present Value?

Scrap Value is a projected value of an asset that can’t be used any longer for original purposes. Or even if we can use the asset, there would be no efficiency.

  • Let’s say that we buy a car for business at $100,000. And we project that the salvage value of the car after 15 years would be $10,000. Now this means two things –
  • First, a used car can be sold at $10,000 after 15 years.
  • Second, the used car can’t offer enough efficiency to keep it for business purposes.
  • Now, if we discount the scrap value to its present value, it wouldn’t be the right estimation; because then, at today’s date, the scrap value would be very less. Plus, how would we find the right discounted rate?

If we imagine that this value would be nil, there would be no chance of any reduction in depreciation. And as a result, the profit of a company can’t be inflated. That’s why it’s wiser to go for zero value while applying depreciation on the asset.

Salvage Value Calculator

You can use the following Calculator.

P
i
y
Salvage Value Formula =
 

Salvage Value Formula =
P (1 − i)y =
0 (1 − 0)0 = 0

Salvage Value in Excel (with excel template)

Let us now do the same example above in Excel.

This is very simple. You need to provide the three inputs: the original cost of the asset, the depreciation rate, and the number of years.

You can easily calculate the SV in the template provided.

salvage value in excel

You can download this template here – Salvage Value Excel Template.

Conclusion

There is confusion between salvage value, scrap value, and residual valueResidual ValueResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. It represents the amount of value the owner will obtain or expect to get eventually when the asset is disposed.read more. In accounting, they all are the same.

The scrap value is an estimated figure. To summarize, it is the value of an asset after its usefulness is over. It can be calculated if we can determine the depreciation rate and the useful life. For tax purposes, the depreciation is calculated in the US by assuming the scrap value as zero.

Salvage Value Video

This has been a guide to what is salvage value (scrap value) and its meaning? Here we discuss the formula to calculate salvage value along with examples and templates. You can also refer to the following articles to learn more about accounting –

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Comments

  1. Namakika says

    Its so great i have learnt alot. Thank u