Salvage value is the approximate value of an asset at the end of its useful life. Using both purchase price and a given accounting method, such as straight-line or double declining balance, one can calculate the amount of annual depreciation being attributed to an asset based on its salvage value. Salvage value is an estimate, while depreciation is a calculation based off this amount.
For example, imagine Company A purchases a computer for $2,000, which has an estimated useful life of 5 years. Based upon reasonable assumptions and knowledge, Company A concludes that it may be able to sell the computer for $500 once this 5 year time period is up. Using straight-line depreciation, Company A can calculate the amount of depreciation as follows:
($2,000 purchase price - $500 salvage value) / 5 year useful life = $300 of annual depreciation
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
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