What it is:
How it works (Example):
For example, let's assume you buy a car for $20,000. You believe that the car could last for 15 years. After that, the car is probably "run into the ground" and its next stop is the junkyard. The salvage value of the car is the price a junkyard or recycler might pay you for the old, nonworking car.
In the business world, salvage values are very important because they help companies calculate depreciation. For example, let's assume Company XYZ purchases a piece of machinery for $1 million, and that piece of machinery is expected to last for 10 years. After that, the machinery is estimated to be worth, say, $10,000. Thus, Company XYZ would record a depreciation expense equal to $990,000 over 10 years (there are a variety of ways to do that).
Why it Matters:
Salvage values are important in business because they affect the size of a company'sexpense (and thus they affect ). It is important to , however, that salvage values are merely estimates. Nobody knows what an be worth 10 years in advance.