The majority of companies assume the residual value of an asset at the end of its useful life is zero, which maximizes the depreciation expense (and tax benefits). Under straight-line depreciation, the asset’s value is reduced in equal increments per year until reaching a residual value of zero by the end of its useful life. Lower Salvage (Residual) Value → Higher Annual Depreciation.Higher Salvage (Residual) Value → Lower Annual Depreciation.The impact of the salvage (residual) value assumption on the annual depreciation of the asset is as follows. If the residual value assumption is set as zero, then the depreciation expense each year will be higher, and the tax benefits from depreciation will be fully maximized. The formula for calculating the salvage value is as follows.Īnnual Depreciation = (Purchase Price of Asset – Salvage Value) / Useful Life Step 2: The original purchase price is subtracted from the total depreciation expensed across the useful life.
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