What is the residual value of an asset?

What is the residual value of an asset?

The residual value (also known as salvage value) of an asset is the amount that would be received for the asset at the end of its lease term or useful life.

Residual value is used within facilities management in the determination of the total cost of ownership (TCO) of an asset. Historically, residual value has been an accounting term that is used to determine the correct rate of depreciation to apply to an asset.

Facilities managers use TCO in ensuring that the costs of maintaining the built environment are as accurate as possible.

For example, if an asset costs £20,000 and has a residual value of £5,000 and a useful life of 5 years, the most appropriate level of depreciation to apply would be £3,000 per year i.e. (£20,000 - £5,000) / 5

This would give rise to a depreciation schedule as follows:

Time

Asset Value

Total Depreciation

At purchase

£20,000

£0

After 1 Year

£17,000

£3,000

After 2 Years

£14,000

£6,000

After 3 Years

£11,000

£9,000

After 4 Years

£8,000

£12,000

After 5 Years

£5,000

£15,000

How do I calculate residual value for an asset?

Residual value may be specified at the point of purchase (or lease) or may be a function of market values. Where for example the leasing company agrees to buy back the asset at the end of a certain term, they may provide you with a price for this repurchase when you sign the lease. This is often the case where the asset in question is a car or some other vehicle.

There are, however, many circumstances where the residual value is not known at the time at which the asset is purchased. Examples of this include situations where the residual value is based on scrap value of the materials or components. This can often be made more difficult based on the fact that the useful life of the asset could be 20 years, during which time there may be considerable advancement in technology.

In such situations, facilities managers often use their best guess (and any data available) as to what the likely value will be at that point.