It is the estimated value that the asset will realize upon its sale at the end of its useful life. The value is used in accounting to determine depreciation amounts and in the tax system to determine deductions.
The salvage value is not discounted to its present value. The salvage value concept can be used in a fraudulent manner to estimate a high salvage value for certain assets, which results in the under-reporting of depreciation and therefore of higher profits than would normally be the case.
For example, ABC company buys a asset for Rs. 1,00,000 and salvage value is Rs.10,000 in five years when it plans to dispose of the asset. It means ABC company will depreciate Rs.90,000 in five years leaving Rs.10,000 at the cost remaining at the end of the year.
Salvage value is an estimated amount that is expected to be received at the end of a plant assets useful life. Salvage value is sometimes referred to as disposal value, residual value, terminal value, or scrap value.