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Residual Value (Definition, Example) | How to Calculate? - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell ican today we have a
topic with us is called residual value
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we are trying to learn this in a very
detailed format here there is a tab here
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which has couple of details let's try
and read this first and then we will try
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and get the nitty-gritty of this
particular topic in a much more detailed
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way see residual value is defined as the
estimated this is very important scrap
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value of any asset at the end of its
lease or its economic or useful life so
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it is also known as the salvage value of
any asset now let's begin first let's
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learn what is the residual value see
residual value is defined as the
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estimated scrap value of an asset at the
end of the lease or its
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economic or useful life okay so it is
also known as salvage value of any asset
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so this represents that the amount of
the value which is the owner of that
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particular asset will obtain or we'll
expect to get eventually when the asset
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is dispositioned okay now for different
industries the value has different
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meaning now if you see in case of the
resident value in accounting if you see
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for accounting part are the owner's
equity okay the the owner's equity is
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taken from the residual of the assets
you know minus the liability and while
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doing the investment okay
evaluation this value is calculated by
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subtracting the cost of capital from
profits of profit minus cost of capital
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here from so it is used for the
calculation of the depreciation so in
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many circumstances the assumptions for
the value is taken to be you know what
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we call as nil because of the small
value
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of many fixed assets and difficulties
associated with forecasting what the
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value can be in the future so in order
to get the value of an asset one must
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deduct the estimated cost one must take
the deduct the estimated cost that is
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required for
disposing of the asset and these value
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of any asset is generally the
calculation of the residual value and it
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is and it is the fair market value which
is we also suggest it is called as FMV
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the fair market value as decided by the
agreement or mentioned in the prison
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let's do a breakdown of a residual value
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now suppose you lease out okay you lease out a per for the next 5 years let's say
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and then the residual value of their car
after 5 years so it is often fixed by
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the bank which issues the lease and is
completely estimated on the basis of the
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past models okay it is completely based
on the possible and the future
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prediction so with interest rates and
relevant taxes it is very important
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factor for determining the cause monthly
lease payment okay
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so the concept is used in our regular
manner for calculation of the assets
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depreciation expenses or since the value
is the ending value of asset so it must
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be subtracted from the purchase amount
to get the total amount and gives us
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depreciation amounts in the
straight-line method that is in the SLM
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method these amount will be divided by
the assets useful life in years to get
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the annual depreciation expense for the
year so these method is also used in the
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valuation process now in the domain of the finance the salvage value or the scrap
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value is used to find out the value of
the cash flow that is generated by the
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company after the frame and it is used
for the focus so if there is a focus
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projection for let's in next 20 years
with an assumption that the company will
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operate for the next 20 years then the
flow projected for the remaining years
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must be valued in the in case the
capital budgeting process okay it gives
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a clear understanding of the amount
which you can sell of the asset after
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the form has finished using or when the
asset has a cash flows cannot be
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accurately been forecasted so now we
will try and take the example to
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understand the residual value portion
see let's consider the residual value
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example of printing machinery now the
printing machinery costs us
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$20,000 and we can safely
assume that the estimated service life
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of the machine is let's say 10 years so
it can be estimated that at the end of
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the service life
it can be sold as the scrap metal okay -
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dumping grounds of $3,000 and the cost
of disposing the machinery is $100 which
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the owner is required to pay for
transporting the machine to the dump for
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the calculation of the scrap value for
the printing machine is 2900 that is
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$3,000 less $100 now there
are in total three ways to calculate the
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residual value see the first one there
are several ways the first one is no
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value now the first and the foremost
option for the asset with the lower
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value is to undergo no residual value
calculation and here an assumption is
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made that you know these assets have no
value at the end of their use date so
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this is preferred by many accountants
because it helps in simplifying the
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calculations of the depreciations and
this is very efficient method for those
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assets whose amount of the value comes
much below the predetermined threshold
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level but the final amount of the
depreciation which comes by following
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this method is higher than the times
when the residual value is taken in
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count second is the comparables okay now
you know the second method is comparable
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when the residual value is calculated it
all and is compared with the residual
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value of all comparable assets which are
traded in the well-organized
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markets so this is the most defensible
and say this is the most defensible
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approach which is used for example if
there is a considerably big market it is
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used by car then this is
this has actually been used for the
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basis of calculation of the residual
value of similar type of four cars the
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third is a way of valuing through policy
so the third one is policy there can be
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company policy that the residual value
of for all the assets which comes under
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certain class is always taken to be the
same so this approach cannot be termed
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as defensive on the Citizen of the
policy has derived a value and it can be
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higher than the market value and using
this method will reduce the depreciation
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expense for the business so these
approach is not followed until and
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unless the policy based value is kept at
very conservative so finally let me make
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my conclusions on this on this
particular topic see it must be kept in
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mind that these value of an asset should
be calculated every year at the end of
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each year specifically so if there is a
change in the value estimation okay
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while checking them these changes be
kept in the record so as to keep the
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track on the changes residual value in
accounting estimates so residual value
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salvage value and scrap value are
similar terms which are used to refer to
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expected value of the asset at the end
of the useful life and these amount is
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often assumed to be we call it as zero
so that's it for this particular topic
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