Definition: Salvage value also called residual or scrap value is the estimated worth of an asset at the end of its useful life. In other words, salvage value is the price management believes it can sell an asset for after the asset is deemed unusable because of time, abuse, and obsolescence. For non-accountants, the term scrap value makes more sense because this is the value of the asset after it can no longer be used. Scrap value is the amount of money that can be salvaged from the used assets.
What Does Salvage Value Mean?
Salvage value is used in calculating depreciation and making equipment purchase decisions. Management will often consider the estimated salvage value of an asset when deciding to make a new equipment purchase because a salvage value will often lower the total cost of the asset over time since the salvage value can be recouped when the asset is later sold.
Some company assets are completely worthless after their useful life like computers. Company computers usually have a useful life of three to five years. After the useful life, these computers are obsolete and have no salvage value. They can’t be sold for anything.
Other company assets, like vehicles, have a salvage value because they can be sold after their useful lives. Vehicles usually have a useful life of five to ten years. At the end of the vehicle’s useful life, the company can sell the car for a small amount of money or sell it to a junkyard for parts. Either way, the vehicle has value.
For instance, a company purchases a delivery car for $10,000 and estimates its useful life to be five years. It uses the car for five years and sells it to a used car lot for $1,500. $1,500 would be the residual or salvage value.