What is Salvage Value

In economics, commerce or accounting, salvage value is an important concept. It is a concept that arises out of the need for valuation of assets.

What is Salvage Value of an Asset?
Salvage value is the estimated selling value of any asset, after it has reached the end of service life or its value has depreciated substantially. It is the total net worth of any asset after it has exhausted its useful life span. Calculating it is an important part of asset management, as well as tax calculation. It is a regular accounting exercise, as one needs to determine the depreciation of asset value. It is also considered in the calculation for tax deductions and therefore, it is vital that you know what it means.

The monetary value of an object depends on the years of its usage, its physical condition and it's degree of usefulness. For most assets, with each year of usage its resale value or its salvage value generally decreases.

Wealth of an individual person or a company is generally classified in two types. One part is liquid assets and other part is non-liquid assets, which could be in the forms of physical assets like property and stocks. Salvage value needs to be taken into consideration for the non-liquid assets like cars and other property. There are certain tax deductions that one could be eligible for if one donates certain types of property. To calculate those tax deductions, salvage value of the donated items must be known. It is also considered by insurance companies in cases of accident and other cases of damage.

In case you are buying or selling any used asset, then you need to determine the asset's salvage value. To do that, you need to research the current market prices for that product and what is the asking rate for it. From that, you can make a rough estimation of what the price of that asset is according to years of use. Be it any asset like furniture, a car, house or anything else, the procedure remains the same. Calculating the value is not an exact science and it is subject to market variability or volatility in pricing.

The things that you need for this calculation are the base price of the vehicle, current estimated market price and the number of years in usage. In some countries, the depreciation percentages for every type of asset are decided by the income tax department and tax deductions are provided accordingly.

As an example, consider an asset whose base price or purchasing price was $10,000 and its salvage value after five years is $5000. Then it has depreciated in a straight line fashion, at the rate of $1,000 per year.

Calculation Technique
In United States of America, the tax system provides you with a tax deduction if you donate a used car. The amount of tax deduction is dependent on the salvage value of the car. That is why, in such a case, it's important that it be determined. It is generally determined with respect to current market price for that vehicle, if it had been sold.

Insurance companies need to determine the asset value of an insured car, which has undergone an accident. The amount of compensation that will be paid for the insured car, by the insurance company will be determined by the car's salvage value and extent of damage inflicted by the accident. Valuation of things is important part of any business.