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Financial Definition of SCRAP VALUE
What It Is
Scrap value, also called salvage value, is the value of an asset after it has come to the end of its useful life.
How It Works
Let's assume you buy a car for $20,000. You believe 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 scrap value of the car is the price a junkyard or recycler might pay you for the old, nonworking car.
In the business world, scrap 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
Scrap values are important in business because they affect the size of a company's depreciation expense (and thus they affect net income). It is important to note, however, that scrap values are merely estimates. Nobody knows what an asset will be worth 10 years in advance.
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