Definition and Meaning
Salvage value is the projected value that an asset will realize on its sale at the end of its useful life. The price is used in accounting for decidingthe depreciation amounts, and in the tax system to determine the deductions.Salvage value is the projected resale value of an asset at the close of its useful life. You deductthe salvage value from the cost of a fixed asset to decide the quantity of the asset price that you will depreciate. Thus, salvage value is solitary used as a component of depreciation calculation.
If it is excessively difficult to govern a salvage value, or if it is expected to be negligible, then it is not necessary to include a salvage value in your depreciation calculations. Instead, simply depreciate the complete cost of the fixed asset over its useful life. You will then recognize the proceeds from the subsequent disposition of the asset as an advantage. Salvage value is not reduced to its present value. It is also known as residual value.
Residual value is one of the ingredients of a leasing calculus or operation. It designates the future value of a good in terms of percentage of depreciation ofits primary value.
Example: A Honda is sold at a listing price of $20,000 today. After it has been used for 3 years and 50,000 miles,its value will contractually be defined as 50% or $10,000.Thus, the credited amount, on which the interest is functional, will be $20,000 which is the present value minus $10,000 which is the future value.Residual values are contractually allocatedwith either in terms of closed contracts or open contracts.
Formula to calculate the residual value
The formula to estimate the residual value can be understood by the following example:
A company possessesa machine which was bought for $20,000. This machine has avaluable life of five years which has just completed. The company sees that if it sells the machine currently,it will be able to recover 10% of theacquisition price. Hence, the residual value would be:
Residual value= 10% X 20000= 2000