Estimated Residual Value
Expected cash value of an asset at the end of its useful life. Also called residual value, scrap value, or salvage value
Estimated residual value, also known as residual value or residual price, is the estimated value of an asset at the end of its useful life. In other words, it is the predicted selling price of an asset after it has been fully depreciated or used. The residual value is usually calculated as a percentage of the original cost of the asset and is used to determine the depreciation expense for accounting purposes.
For example, if a company purchases a piece of equipment for $50,000 and estimates that the residual value at the end of its useful life will be $10,000, the total depreciation expense would be $40,000 ($50,000 – $10,000) over the useful life of the asset.
The residual value is important in several ways. For instance, it helps determine the actual cost of an asset when it is sold at the end of its life. It also influences the amount of depreciation to be charged during the useful life of the asset. Additionally, the residual value can impact financing decisions when purchasing an asset, as it can affect the amount of financing required or the terms of a lease arrangement.
It is important to note that the actual residual value may differ from the estimated value due to changes in market conditions or unexpected events that affect the demand or supply of the asset. Therefore, companies should regularly review and update their estimated residual values to ensure that they accurately reflect the current market conditions and other relevant factors.
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