How To Calculate Residual Values - Sapling

1. Personal Finance
2. Budgeting

How to Calculate Residual Values By Scott Shpak Close-up of foreign money and man using calculator Image Credit: LDProd/iStock/Getty Images

Knowing the future is handy when it comes to personal finance. While nobody has an all-seeing crystal ball, there are calculations that can help you know how time will affect your assets. For example, when you're planning your retirement, it's important to know how much money an investment will make as it appreciates over time. In many cases, the future value of an asset that loses value also can be calculated. This is called residual value, the amount your depreciating asset is worth at some point in the future.

Advertisement

Using the Straight-Line Residual Value Formula

Video of the Day

Step 1

Collect the information needed to calculate the residual value of your asset. You'll need its original cost, the number of years you will use the asset -- whether by choice or lifespan of the asset -- and the asset's scrap, or resale, value. Scrap value information may be available, such as with automobile blue book values. If not, it may be estimated.

Advertisement

We Recommend

Personal Finance How to Calculate Depreciation Value in India By Farida Rangwala Personal Finance How to Calculate the Net Working Capital on Cash Flow By Bryan Keythman Personal Finance Diminishing Balance vs. Straight Line Depreciation By Jay Way

Video of the Day

Step 2

Calculate the difference between the asset's cost and its scrap value at the end of its lifespan. For example, if a new car was purchased for $35,000 and its resale value is $20,000 in three years, the difference is $15,000.

Step 3

Divide the difference by the number of years in the asset's lifespan. Using the example above, divide $15,000 by three years. The residual value of this car is $5,000. This calculation is also known as straight-line depreciation.

Advertisement

Using the Double-Declining Balance Residual Value Formula

Step 1

Use the double-declining formula to calculate residual value for assets that lose value more quickly at the start of ownership. This usually reflects how value of machinery actually depreciates. Calculated annually, this calculation requires the purchase price of the asset and its lifespan, and calculates the effective scrap value at the end of the lifespan by depreciating the asset each year using a factor of two.

Advertisement

We Recommend

Personal Finance How to Calculate Depreciation Value in India By Farida Rangwala Personal Finance How to Calculate the Net Working Capital on Cash Flow By Bryan Keythman Personal Finance Diminishing Balance vs. Straight Line Depreciation By Jay Way

Step 2

Multiply the purchase price of the asset by the factor of two for the first year of the calculation. Using the example of the car, the doubled amount is $70,000. Divide this number by the lifespan, three in this example, to give $23,333, which is the amount of depreciation for the first year. Subtracting depreciation from the $35,000 purchase price gives a residual value of $11,667. This is also referred to as the net book value, and it is the starting value for year two calculations.

Advertisement

Step 3

Use the net book value at the end of the first year to perform the same calculation for the second year of the life of the vehicle. Multiply $11,667 by two, equalling $23,334, then divide that amount by the three-year lifespan, or $7,778. Subtract that from the net book value for the start of the year, or $3,889. Repeating this calculation for the third year gives a residual value of $2,592.

Advertisement

Advertisement

related articles

1

How to Calculate Net Book Value

2

How to Calculate CARG

3

Depreciation Accounting Rules as Per the US GAAP

You May Also Like

1

How to Calculate Accumulated Depreciation

2

How to Calculate a Machine's Depreciation

3

How to Find NPV on Financial Calculator