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Scrap Value

See Also:
Adjusted Present Value (APV)
Asset Market Value vs Asset Book Value
Future Value
Going Concern Value
Customer Analysis

Scrap Value Definition

The scrap value definition, also known as salvage value, is the value of an asset after it is fully depreciated. Once an asset reaches the point where it is fully depreciated, has lost the vast majority of production efficiency due to use, and is ready to be resold, it has reached the scrap value. At this point, managers must make the decision of whether to sell the asset for it’s material, or recyclable value, continue using it despite the fact that it is no longer in good operating condition, or trash the asset.

Scrap Value Explanation

Scrap value, explained as the value an asset has on the open market after it has surpassed it’s useful lifetime, is very important in the eyes of accountants and CFO’s. Because financial planners in a company deal closely with assets and their depreciation schedules, they are the main monitoring body which decides when a piece of equipment has reached it’s scrap value in accounting. These financial managers, working with GAAP and any government requirements placed upon them, decide the amount of use an item can take before it becomes useless. With this they decide how much of this use happens per year, known as depreciation, and when a piece of equipment can no longer be used.

Final Scrap Value

Once an item reaches it’s final scrap value, accounting professionals see several available options. First, the item can be sold to another company which can still make use of the asset, despite the less-than-optimal condition it is in. This depends on the chosen depreciation schedule and whether the item can still operate, in some ways, as designed.

Second, the item can be sold for it’s value in raw materials. For example, a large printing press can be sold for it’s metal content to a recycling facility after it is no longer able to be used for printing purposes. Though this item will be sold for a relatively small amount of money it will still create some value for the company.

Third, the item can be trashed if it has no real scrap value. In this scenario, the item has such little value that it creates more cost in resale than it does when thrown away. An example of this would be an old computer: the man hours spent to resell the computer often outweigh the income gained from selling it.

Only material assets have a scrap value. To simplify, if an asset does not depreciate it does not have a scrap value. For example, this scrap value wiki will never depreciate and thus has no scrap value in accounting.

Scrap Value Calculation

There is no simple method for scrap value calculation. More, scrap value is a result of market factors. On one hand, one must figure out the market value for an almost useless asset. This will provide the scrap value if it is sold for use.

On the other hand, one must also figure out the total value of the raw materials contained in the asset. This will lead to the value of the asset if it is recycled.

Whichever of these values is greater will become the scrap value for the asset. The reasoning behind this is simple: company controllers will, obviously, choose to sell the item for more rather than less money.

Scrap Value Example

For example, Leo is the head accountant at a company which prints marketing messages on common items: hats, cups, silverware, and other items designed to attract attention for a business when they are used. Leo likes his work because it allows him to bring value to his company through the decisions and analysis he performs.

Then, Leo, performing his monthly tasks, notices that one of the company assets is nearing the end of it’s depreciation schedule. Once it reaches the end of this schedule it will be at scrap value. Leo, the ever-active analyst, must make the decision of how to gain maximum value from the scrapped piece of equipment.

Leo notices that he recorded a market value for the scrapped piece of equipment in recycling. He notes this value as he moves forward with his work. Leo explores other options before he makes a decision.

Leo does a bit of networking and finds a potential buyer for the scrapped printer which is nearing the end of it’s lifetime. This buyer, knowing that the item will not be able to perform some of the functions it was originally designed for, is willing to offer $5,000.

Next, Leo talks with a decision maker at a local scrap metal company. The item is found to have $2,500 in value for the metal it is made of. The scrap metal company, however, can not pick up the item. It will have to be shipped to their headquarters. This salvage value is less than Leo initially found. He attributes this difference to changes in the market value for metals.

Calculate Total Cost

Leo calculates the total cost for his company to sell the item. What he finds is shocking. The company will gain more monetary value from trashing the item than it will selling it. The math is simple: disassembling and shipping the item to his buyer will cost $5,015. Though his company only saves $15, Leo knows that “a penny saved is a penny earned”.

Conversely, to disassemble and ship the large printer to the scrap metal company will be slightly less than this. This, combined with the negotiating time spent at the scrap metal company will result in a loss of $5. Once again, Leo will make the prudent financial decision even if it is a small one.

Leo completes his decision. He is happy that he did the proper research. His work results in a greater company value than if he had not. Leo loves his work for this very reason: he can make a difference in the lives of the company employees and shareholders.

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Double-Declining Method Depreciation

See Also:
Double-Declining Depreciation Formula
Accelerated Method of Depreciation
Double-Declining Method Depreciation
Straight-Line Depreciation
Depreciation
GAAP
Fixed Assets – NonCurrent Assets

Double Declining Depreciation: Definition

Double-declining depreciation, defined as an accelerated method of depreciation, is a GAAP approved method for discounting the value of equipment as it ages. It depreciates a tangible asset using twice the straight-line depreciation rate.

Double Declining Depreciation: Explanation

Double declining depreciation, explained as one of the most common methods to depreciate tools, is everywhere. The idea is that the asset’s value declines more steeply in the early years of usage. The result is that the depreciation expenses are larger in beginning and then get smaller over time.

Companies often use this method of depreciation for tax purposes. Because the depreciation expenses are larger in the early periods of the asset’s useful life, the

savings are greater in the beginning of the depreciation cycle and the tax benefits come sooner.

Double-Declining Balance Method: Schedule

When using double-declining balance method schedule, the depreciation rate stays the same, the depreciation expense gets smaller each period, and the depreciable base gets smaller each period.

Begin with the depreciable base, and then calculate the depreciation expense for the period. Subtract that depreciation expense from the depreciable base to get the depreciable base for the next period. Repeat this process until you reach the salvage value. If the final depreciation expense would bring the asset value below salvage value, then simply subtract salvage value from that period’s depreciable base to get the final depreciation expense.

For example, if you have an asset with a purchase price of $1,000, a salvage value of $100, and a useful life of 5 years, then the straight-line depreciation rate will be 20%. The double-declining depreciation rate would then be 40%. The double declining depreciation table for the asset would look like this:

YearDepreciable Base      Depreciation Rate      Depreciation Expense

  1    $1,000                  40%                               $400
  2    $600                    40%                               $240
  3    $360                    40%                               $144
  4    $216                    40%                               $86.40
  5    $129.60                  -                                $29.60

 

Double Declining Depreciation: Example

Brian is an accountant for small businesses. A trained CPA, Brian uses his skills to make sure each of his client businesses receives the financial management it needs.

He is approached by a customer who needs to depreciate his equipment. Brian naturally turns to double declining depreciation, GAAP compliance, simple application, and other benefits of this method make it a perfect fit for this job. Brian then collects information and performs the calculation below:

Purchase price is $1,000; Salvage value is $100; and useful life is 5 years

Depreciable Base = $1,000 – $100 = $900

Depreciation Expense = $900 / 5 = 180

Double Declining Depreciation Rate = $180 / $900 = 20%

Brian finds that the double declining depreciation method, here, yields a rate of 20%. He then creates the schedule above. This allows a clear understanding of how each depreciation expense relates to time.

Brian knows the value of financial management. Where many potential clients have failed, he has led many of his customers to success through this alone. He values the double declining depreciation schedule he has created here because it may create the same effect for this client.

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Bailout Payback Method

See Also:
Capital Budgeting Method
Direct Method Allocation
Double Declining Method Depreciation
Internal Rate of Return Method
NPV vs Payback Method

Bailout Payback Method Definition

In accounting, bailout payback method shows the length of time required to repay the total initial investment through investment cash flows combined with salvage value. The shorter the payback period, the more attractive a company is.

Bailout Payback Calculation

For example, a company invested $20,000 for a project and expected $5,000 cash flow annually.

1. Payback period = 20,000 / 5,000 = 4

2. Bailout payback

At the end of year  Cash flow Salvage valueCumulative payback
1               5,000   12,000               17,000
2              10,000   10,000               20,000
3              15,000    8,000               23,000
4              20,000    6,000               26,000

Bailout payback = 2, at the end of year 2, the cumulative payback of $20,000 is equal to the initial investment of $20,000.

Payback Period vs Bailout Payback

The second type of payback, bailout payback method, is similar like payback period method. The difference between these two is that bailout payback model incorporates the salvage value of the asset into the calculation and measures the length of the payback period when the periodic cash inflows are combined with the salvage value.

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