Salvage Value

What Is Salvage Value?

Salvage value, also called residual value or scrap value, is the amount a business expects to receive when it sells, trades in, or disposes of an asset at the end of its useful life. A company might use a delivery truck for several years and then sell it for parts or to another buyer. The estimated amount it expects to get back is the salvage value.

How It Is Used

Salvage value matters mainly for depreciation, the accounting method that spreads the cost of a long-lived asset across the years it is used. The depreciable base is the asset's original cost minus its salvage value. Salvage value is therefore the portion of the cost the company does not expect to write off as an expense. A higher salvage value means less depreciation each year, while a lower one means more.

Salvage value is an estimate made at the time of purchase, and companies often review it as conditions change. Under many accounting approaches it is treated as zero for simplicity when it is expected to be small.

Example

Suppose a company buys a machine for 50,000 dollars and expects to sell it for 5,000 dollars after 10 years. Under the straight-line depreciation method, the depreciable amount is 45,000 dollars. Dividing that by 10 years gives annual depreciation of 4,500 dollars. After 10 years, the machine's book value would equal its estimated salvage value of 5,000 dollars.

Why It Matters to Investors

Salvage value affects reported profit and the value of assets on the balance sheet. Investors reading financial statements may compare how different companies estimate salvage values, since aggressive estimates can make earnings look stronger in the short term. Because these figures are estimates rather than market prices, they show management's assumptions and should be read alongside the company's notes on accounting policies.