what is salvage value

Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. It is also known as residual value or scrap value. The estimated salvage value is deducted from the cost of the asset to determine the total depreciable amount of an asset. It is an important component in the calculation of a depreciation schedule. The formula for calculating the salvage value is the original cost of purchase minus the product of the annual depreciation expense and the number of years. If it is too difficult to determine a salvage value, or if the salvage value is expected to be minimal, then it is not necessary to include a salvage value in depreciation calculations. The Internal Revenue Service (IRS) requires companies to estimate a “reasonable” salvage value, which depends on how long the company expects to use the asset and how hard the asset is used.