Resale Value

How Does Resale Value Work?

The resale value is determined by assessing the amount an item can fetch in the secondary market after its initial purchase (post-usage).

Both sides in a transaction involving a used product—the buyer and seller—must carefully consider the residual value to negotiate an amicable price that reflects the remaining value that can be derived from the product.

In other words, the buyer will offer to purchase the used product only if the residual value that can be obtained post-purchase is deemed enough to proceed with the transaction (and the usage to date will be priced in).

The fact that the product is used, rather than new, is a significant factor to consider, as the “wear and tear” can warrant a steep discount because of the reduced attractiveness of the item.

Consumer awareness of resale potential significantly affects purchasing decisions. The awareness of an item’s resale value can reduce consumer “guilt” from purchasing new products, encouraging more buying behavior (i.e. rationalize the purchase at check-out).

For example, consumers who know they can resell their items are more likely to purchase high-value goods, as they anticipate recouping some of the cost through resale.

Hence, that sort of rationalization to purchase a product—aware that the product could later on be sold at a reasonable price (or perhaps a premium)—has contributed toward a thriving market for pre-owned items, as exhibited by the discretionary luxury goods industry, where brands and consumers engage in circular trade, enhancing sustainability and reducing waste.

What Factors Determine Resale Value?

There are several factors that influence the resale value of a product or service, as outlined in the following table:

How Does Resale Value Impact Depreciation?

Companies frequently estimate the resale value of the long-term assets under their ownership to put together a depreciation schedule for internal purposes, which is to facilitate informed decisions (e.g. asset sale), ensuring resources are allocated efficiently.

From an accounting standpoint, the resale value is inherently tied to the concept of depreciation, which refers to the gradual reduction of the carrying value of a fixed asset (PP&E), recorded on the balance sheet.

Where:

• Original Purchase Price ➝ Initial Cost to Purchase Fixed Asset (PP&E)
• Salvage Value ➝ Resale Value of Fixed Asset (PP&E)
• Useful Life ➝ Estimated Time of Positive Economic Utility (or Number of Years Used)

The resale value, or salvage value assumption, influences the depreciation expense recognized on the income statement.

With that said, the estimated resale value can impact the income tax expense and potentially contribute toward tax savings, assuming the salvage value is assumed to be zero (or near-zero), which tends to be the norm.

Accounting Nuance — Salvage Value vs. Resale Value

The implicit assumption for the useful life—in the context of computing the depreciation expense—is that the fixed asset (PP&E) will be close to fully depleted and sold near the end.

The resale value concept, in contrast, can be applied to scenarios in which the fixed asset is sold at any given moment (i.e. the number of years in which the asset is expected to be used).

Put differently, a used car can be sold one year after the original purchase date and the estimated sale price would be referred to as the resale value, not salvage value.

How to Calculate Resale Value

To estimate the resale value of an asset, start by determining the asset’s original purchase price, which serves as the base value.

Once determined, estimate the depreciation rate, which refers to the annual percentage at which the item loses value, often derived from industry standards or comparable used items.

Given the depreciation rate, calculate the number of years the asset has been used, which will ultimately determine the total depreciation (i.e. accumulated depreciation).

Upon doing so, subtract the depreciation rate from one to determine the remaining value percentage per year, and then raise the result to the power of the number of years used to account for the compounding effect of depreciation over time.

By multiplying the compounded rate by the original purchase price, we can obtain the estimated resale value.

Therefore, factoring in the gradual reduction in value via depreciation reflects a more accurate market value of the used item (i.e. the actual price at which the asset could be sold for in the open markets)

Combined, the summarized step-by-step process of calculating the resale value is as follows.

• Step 1 ➝ Determine the Original Purchase Price
• Step 2 ➝ Estimate Depreciation Rate and Useful Life Assumption (or Number of Years Used)
• Step 3 ➝ Subtract Depreciation Rate from 1 (i.e. Depreciation Rate)
• Step 4 ➝ Raise Resulting Figure to the Power of the Number of Years Used
• Step 5 ➝ Multiply by the Original Purchase Price

Resale Value Formula

The formula to calculate resale value is as follows:

Where:

• Original Purchase Price ➝ The original purchase price is the price at which the item was initial bought.
• Depreciation Rate ➝ The depreciation rate represents the percentage rate at which the item loses value, expressed on an annual basis.
• Number of Years ➝ The number of years refers to the time in which the product has been used.

Resale Value Calculation Example: Used Car Trade In

Suppose a car was purchased for $30k, and the vehicle depreciates at a rate of 15% per year.

After usage of the car for a total of four years, the buyer—who is now the seller—wants to estimate the resale value to decide where to set the price point.

• Original Purchase Price = $30,000
• Depreciation Rate (%) = 15.0%
• Number of Years = 4 Years

The current market value of the car will be a function of various internal factors, such as the vehicle condition, internal or external damage, and total mileage, as well as external factors like the currrent market conditions (i.e. interest rate, economic state).

Starting off, we’ll calculate the depreciation factor, which equals one subtracted by the depreciation rate, raised to the power of the number of years that the product was used.

• Depreciation Factor = (1 – 0.15) ^ 4 = 0.52, or 5.2%

Given depreciation factor, we can calculate the resale value by multiplying the original purchase price by the depreciation factor.

• Resale Value = $30,000 × 5.2% = $15,660

So, how much could the used vehicle be sold for as of the present date?

The resale value of the car after 4 years of usage is estimated to be around $15,660.

The $15,660 estimate represents the current market value of the used vehicle.

In closing, both the buyer and seller can make more informed decisions, and negotiate pricing appropriately, by understanding the dynamics surrounding the resale value concept.

Resale Value Example: Apple Trade-In Program

The trade-in program offered by Apple (NASDAQ: AAPL) illustrates how a major brand leverages resale value to improve customer loyalty and encourage repeat purchases (and recurring revenue).

If a customer decides to trade in their old Apple devices, an Apple representative will review the quality of the device and conduct an accurate appraisal of the used product’s residual value.

Once estimated, the customer is entitled to receive credit toward their next purchase of a new product offered by Apple (or an Apple Store gift card) — whichever the consumer prefers.

The appraisal process analyzes the device’s model, age, and condition, which is now efficiently performed using an automated process in-store using proprietary software (or upon receipt of the package shipped via mail), instead of a manual review.

^{Apple Trade-In Program Process (Source: Apple Shop Trade-In)}

Upon completion of the appraisal, Apple determines the trade-in value, which is communicated to the customer and offered to the customer in the form of credit.

For instance, a well-maintained iPhone 14 Pro Max in near-perfect condition has a trade-in value of up to $630 at present, which can be applied towards the purchase of a new iPhone (e.g. iPhone 15 or the upcoming iPhone 16).

The trade-inprogram not only provides financial incentives but also emphasizes environmental responsibility.

How? The devices that are traded in are often refurbished and resold as certified pre-owned products, extending their lifecycle and reducing electronic waste.

Therefore, Apple’s trade-in program appeals to environmentally conscious consumers and enhances Apple’s brand image as a company committed to sustainability.

Furthermore, the trade-in program is a strategic component of Apple’s current business model, where the objective is to encourage repeat purchases, creating a recurring revenue stream.

By offering credit towards new devices—rather than cash that could be spent anywhere—the structure incentivizes customers to remain within the Apple ecosystem, continually upgrading to the latest technology.

Therefore, the strategy builds more brand loyalty and ensures that customers are more likely to return to Apple stores, both online and physical, for their next purchases.

Apple’s trade-in program illustrates the company’s dedication to providing value even after the initial purchase, wherein the spending behavior of existing customers is “circular” as opposed to one-time sales.

In effect, customers often appreciate the option to receive value in return (i.e. credit) for their older devices, which might otherwise sit unused or be discarded.

The practice strengthens customer relationships and creates a sense of added value, as consumers view their purchases from Apple akin to a long-term investment.

^{Apple Trade-In Resale Value Example (Source: Apple Shop Trade-In)}