What is 'Scrap Value'

Scrap value is the worth of a physical asset's individual components when the asset itself is deemed no longer usable. The individual components, known as scrap, are worth something if they can be put to other uses. Sometimes scrap materials can be used as is; other times they must be processed before they can be reused. An item's scrap value is determined by the supply and demand for the materials it can be broken down into.

Scrap value is also referred to as the residual value, salvage value, or break-up value.



In financial accounting, capital assets or long-term assets, such as machinery, vehicles, furniture, etc., have a useful life. After the asset has gone through its useful life, it may be disposed of. However, given that a broken down or obsolete asset may still have some residual value, some businesses can dispose of the asset by selling it for its current value. The value of an asset that has exceeded its useful life is referred to as the scrap value.

Scrap value is the estimated cost that a fixed asset can be sold for after factoring in full depreciation. The asset that is disposed of is usually salvaged into multiple parts, with each part valued and sold separately. The formula to calculate scrap value is:

Scrap Value = Cost of Asset – (Depreciation x Useful Life)

Depreciation Methods

Depending on the method of depreciation adopted by a company, such as the straight-line method or declining-balance method, the scrap value of an asset will vary. For example, assume a company purchases machinery worth $75,000 and estimates that the useful life of the machinery is 8 years at a depreciable rate of 12%. Using the straight-line depreciation method, the annual depreciation per year will be 12% x $75,000 = $9,000. The residual amount that the company can get if it disposes of the machinery after 8 years is:

Scrap Value = $75,000 – ($9,000 x 8) = $3,000.

If the company, instead used the declining-balance method of depreciation, its salvage value can be calculated as:


Asset Value $

12% Depreciation $

Year-End Value $

































Total Depreciation



Scrap value = $75,000 – $48,027.42 = $26,972.58.

The scrap value can also be used to calculate the depreciation expense. Using our example above, if the company estimated a $3,000 residual value for the machinery at the end of 8 years, then it can calculate its depreciation expense per year to be ($75,000 - $3,000)/8 = $9,000. Having an estimate for the scrap value of a long-term asset can help a company figure out its annual depreciation cost which is an important measure since it affects the level of a company’s net income.

Negative Scrap Value

The scrap value of an asset can be negative if the cost of disposing the asset results in a net cash outflow that is a contributing factor in the scrap value. For example, consider the value of land owned by a company that only slightly went up in value by the end of its useful life. The scrap value of the land may be negative if the cost of demolishing any building on the land is higher than the cost of the land and the market price for the individual demolished components that can be sold for a value.

In the insurance industry, scrap value is the money that can be recovered for a damaged or abandoned property. In auto or property insurance, the estimated scrap value is subtracted from any loss settlement if the insured keeps the property. An individual who is insured under an auto insurance policy with a $2,000 deductible, will receive a settlement check from the insurer for $2,500 only, if the trade-in value of his damaged car is estimated to be $4,500.

  1. Depreciation

    Depreciation is an accounting method of allocating the cost of ...
  2. Accumulated Depreciation

    Accumulated depreciation is the cumulative depreciation of an ...
  3. Fully Depreciated Asset

    A fully depreciated asset is a property, plant or piece of equipment ...
  4. Useful Life

    The useful life of an asset is an estimate of the number of years ...
  5. Residual Value

    Residual value is the value of an asset at the end of its lease ...
  6. Bonus Depreciation

    A bonus depreciation is a tax relief that allows a business to ...
Related Articles
  1. Investing

    How Depreciation Works on a Rental Property

    One of the advantages of owning rental real estate is the depreciation tax deduction.
  2. Financial Advisor

    How Does Depreciation Reduce My Tax Bill?

    How the depreciation tax rule can assist real estate investors.
  3. Personal Finance

    Consumer Products That Depreciate The Most (And Least)

    Your new car may not hold its value as well as that old collectible toy you kept in perfect condition. Find out which purchases will still be worth something in the years to come.
  4. Investing

    What You Should Know About Real Estate Valuation

    Accurate real estate valuation is important to mortgage lenders, investors, insurers, and buyers and sellers of real property.
  5. Investing

    The Difference Between Enterprise Value and Equity Value

    Enterprise value calculates a business’s current value, while equity value offers a snapshot of that business’s current and potential future value.
  6. Taxes

    Filling out Form 4562, step-by-step

    Step-by-step, how to fill out the depreciation and amortization form for your business tax return.
  7. Insurance

    How Cash Value Builds in a Life Insurance Policy

    If you have permanent life insurance, more of your insurance premium goes to cash value in the early years of your policy.
  8. Investing

    Investment Value Vs. Fair Market Value: How They Differ

    Learn about the differences between an asset's investment value and its fair market value, including why many think fair market value is unrealistic.
  9. Investing

    What's Fair Value?

    Fair value has three different meanings depending on the context.
  10. Investing

    Learn to Value Real Estate Investment Property

    Make sure you know what your real estate investment is worth before you sign the ownership papers. Learn what capitalization rate means to your net operating income.
  1. What is the tax impact of calculating depreciation?

    Understand the tax implications of a company's depreciation. Learn how differences in accounting methods change the amount ... Read Answer >>
  2. How is salvage value used in depreciation calculations?

    Learn how an asset's salvage value is subtracted from its initial cost to determine the amount by which an asset is depreciated ... Read Answer >>
  3. Why is accumulated depreciation a credit balance?

    Accumulated depreciation is the cumulative depreciation of an asset that has been recorded. Accumulated depreciation increases ... Read Answer >>
  4. What is property, plant, and equipment?

    Property, plant, and equipment are physical or tangible assets that are long-term assets that typically have a life of more ... Read Answer >>
  5. What are some examples of the main types of capital expenditures (CAPEX)?

    Learn about different expenses with acquiring assets that are considered capital expenditures and should be depreciated over ... Read Answer >>
Trading Center