Salvage Value: Definition, Estimation, and Examples

What is salvage value?

Salvage value is the estimated amount a company expects to receive when an asset is disposed of at the end of its useful life. It’s used to determine the depreciable amount of an asset (cost minus salvage value) and therefore affects annual depreciation expense and cash-flow forecasting.

Key takeaways

• Salvage value is an estimate of an asset’s recoverable value at the end of its useful life.
• It reduces the total amount depreciated over an asset’s life and influences tax and accounting outcomes.
• Common estimation approaches include a percentage of original cost, independent appraisal, and historical comparables.
• Salvage value itself is not reported on the balance sheet; the balance sheet shows book value (cost less accumulated depreciation).

How salvage value affects depreciation

Depreciable amount = Historical cost − Salvage value

Different depreciation methods allocate that depreciable amount over the asset’s useful life in distinct patterns:
* Straight-line — equal expense each year.
* Declining-balance — accelerated expense based on a fixed percentage of the remaining depreciable amount.
* Double-declining balance — accelerated at twice the straight-line rate.
* Sum-of-years-digits — accelerated using a fraction based on remaining life.
* Units-of-production — expense based on actual usage (units produced).

Companies may set salvage value to zero if they expect no recoverable value. Salvage estimates can be changed prospectively (future depreciation is adjusted).

Estimating salvage value

Common approaches:
* Percentage of original cost: Salvage value = Original cost × Estimated salvage percentage.
* Independent appraisal: Hire a third party to estimate end-of-life market value.
* Historical comparables: Use disposal proceeds from similar past assets (common for fleets, equipment types).

Salvage value is usually an estimate unless a contract or market condition specifies a guaranteed resale price.

Examples

Straight-line example:
* Cost = $5,000; Salvage value = $1,000; Useful life = 5 years
Annual depreciation = (5,000 − 1,000) / 5 = $800 per year

Fleet example:
* Cost for 8 vans = $250,000; Salvage per van = $5,000 → Total salvage = $40,000
Depreciable amount = 250,000 − 40,000 = $210,000
If useful life = 7 years → Annual depreciation = 210,000 / 7 = $30,000

Salvage value vs. related terms

• Book value — historical cost less accumulated depreciation; appears on the balance sheet.
• Residual value — often used in leasing; estimated value at the end of a lease term (can be similar to salvage value but context-specific).
• Scrap value — value when an asset is dismantled or sold for raw materials; a type of salvage value focused on disposal as scrap.

Common questions

Is salvage value the selling price?
* It represents the expected proceeds from disposal, but actual selling price may differ and disposal costs may reduce net proceeds.

Can salvage value be changed?
* Yes. Changes in estimates are applied prospectively to future depreciation.

Why does salvage value matter?
* It determines the portion of cost that will be depreciated, affecting reported expense, taxable income, and cash-flow projections.

Bottom line

Salvage value is a practical estimate used to allocate an asset’s cost over its useful life. Accurate, well-documented estimates—based on percentages, appraisals, or historical data—help produce reliable depreciation schedules and better financial planning.