CFA and I

Wonuola Dantes Written by Wonuola Dantes · 1 min read >

Financial analysis has indeed been an enlightening course of study for me. I have become more conscious of not just accounting terms but how it applies to everyday life. I appreciate more now, the work that accountants do. Dealing with numerous numbers is no small feat, it requires attentiveness and a high degree of accuracy as mistakes need to be avoided at all costs.

I learned about salvage value. This is the estimated value of an asset at the end of its useful life. No wonder my old device which I bought for over N200,000 was sold at less than N50,000 after a few years. I knew that Samsung devices had very poor resale value, but I was rudely shocked at the point that I needed to resell the device. Although, the device had a thin cracked line that ran from the top of the screen to the bottom which I am sure affected the resale value. The duration in which I used the device was 2years and 4 months, i.e., 2.4 years.

Salvage Value = Purchase price – (Annual Depreciation x Number of Years)

I wish that I had the exact value for the depreciation of phone devices, especially the ones that are not the same physically as when they were bought such as scratches, cracks, etc. With this knowledge, I also understand the reason the resale value of old laptops at my place of work is the amount they are. I am aware of how those figures are being calculated and arrived at. Makes me wonder about the retailers whose primary business model is to resell used goods and products. A lot of work must have been done to attach a price to each of their items. I also wonder if they do not run at a loss in the long run, given that the items are not new.

I now understand why a couple of years back, two of my father’s trucks were sold at a much lesser value than the cost he used to not only purchase them but the cost of shipping them into the country. These trucks were newly sold; however, they were not sold until after a few years. This also explains that it does not matter if an equipment or building or any type of asset is used or not, it often has a depreciation value after a given period.

The impact of the salvage value assumption on the annual depreciation of an asset is as follows.

Higher Salvage Value → Lower Annual Depreciation

Lower Salvage Value → Higher Annual Depreciation

More so, if an asset has a time frame for its useful life, and has no salvage value, it means that the salvage value is zero, 0.

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