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salvage price

sreedesh (Executive Accountant) (46 Points)

24 February 2010

Dears

What is salvage price ?

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CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 24 February 2010

Residual value is one of the constituents of a leasing calculus or operation. It describes the future value of a good in terms of percentage of depreciation of its initial value.

Example: A car is sold at a list price of Rs 20,000 today. After a usage of 36 months and 50,000 miles its value is contractually defined as 50%or Rs 10,000. The credited amount, on which the interest is applied, thus is Rs 20,000 present value minus Rs. 10,000 future value.

Residual values are contractually dealt with either in terms of closed contracts or open contracts.

In accounting, Residual value is another name for salvage value, the remaining value of an asset after it has been fully depreciated.

The residual value derives its calculation from a base price, calculated after depreciation.

Residual values are calculated using a number of factors, generally a vehicles market value for the Term and Mileage required is the start point for the calculation, followed by Seasonality, Monthly adjustment, Lifecycle and Disposal performance. The Leasing company setting the Residual Values (RV's) will use their own historical information to insert the adjustment factors within the calculation to set the end value being the Residual value.

In Accounting, the residual value could be defined as an estimated amount that an entity can obtain when disposing of an asset after its useful life has ended. When doing this the estimamted costs of disposing of the asset should be deducted.

The formula to calculate the residual value can be seen with the next example:

A company owns a machine which was bought for Rs. 20,000. This machine has a useful life of 5 years which has just ended. The company knows that if its sells the machine now it will be abble to recover 10% of the price of acquisition.

Therefore, the Residual Value would be:

$Residual Value = 10% \times (20,000) = 2000$