In economics, commerce, or accounting, salvage value is an important concept. It arises out of the need for valuation of assets.
Salvage value is the estimated selling value of any asset, after it has reached the end of its service life or its value has depreciated substantially. It is the total net worth of any asset, after it has exhausted its useful lifespan.
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, the resale value decreases.
Wealth of an individual or a company is generally classified in two types. One part is liquid assets and other is non-liquid assets, which could be in the form of physical assets like property and stocks. Salvage value needs to be taken into consideration for the non-liquid assets like cars and other properties.
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 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 usage. 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 of usage. In some countries, the depreciation percentage for every type of asset is 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 USD 10,000 and its salvage value after five years is USD 5000. Then it has depreciated in a straight line fashion, at the rate of USD 1,000 per year.
In United States of America, the tax system provides you with a deduction, if you donate a used car. The amount of 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.
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 it, by the insurance company, will be determined by the car's salvage value and the extent of damage inflicted by the accident.