Definition
Salvage Value, also known as residual value, is the estimated amount an Assets is expected to be worth at the end of its Useful Life. It is subtracted from the asset’s historical cost to determine the total amount that can be depreciated.
Common Assumption
- For accounting and depreciation purposes, most companies assume the Salvage Value is zero.
Impact of Zero Salvage Value
- Increases Depreciable Base: Makes the total depreciable amount equal to the asset’s full historical cost.
- Increases Annual Depreciation: Results in higher annual Depreciation & Amortization (D&A) expense compared to assuming a positive salvage value (using straight-line method).
- Maximizes Tax Benefits: Allows the company to recognize a larger cumulative depreciation expense over the asset’s life, thereby maximizing the associated Tax Shield.
See also: Depreciation & Amortization (D&A), Useful Life, Assets