Residual value method for imputed interest

Also known as: Subtraction method

The residual value method for imputed interest calculates the imputed interest of a company. The annual capital commitment is determined by the residual values of the assets and thus the imputed interest rate is calculated.

Definition / explanation

Die Restwertmethode ermittelt die kalkulatorischen Zinsen auf das in einem Economic good gebundene Kapital zu einem bestimmten Zeitpunkt.

The average value of an object is calculated over a year and multiplied by a specified imputed interest rate.

The annual imputed interest obtained in this way is a measure of the costs that arise from the money that is not available but is invested in the object. These must be taken into account when calculating the price of those products that are manufactured using the item.

Calculation using the residual value method

The calculation for one year is based on the average value:

Start value + end value / 2 = average value

This average value is multiplied by the imputed interest rate:

Average value * calc. Interest rate = Imputed interest for one year

Overall, the following equation results:

(Value at the beginning of the year + value at the end of the year / 2) * imputed interest rate = imputed interest (for one year)

This calculation is carried out for each year of the useful life of the item, with the imputed interest decreasing each year.

Sample calculation

An example with a 2-year useful life:

Purchase price: 100,000 EUR
Annual depreciation: EUR 50,000
Imputed interest rate: 10 %

Year 1: (100,000 + 50,000 / 2) * 0.1 = 7,500 EUR

Year 2: (50,000 + 0/2) * 0.1 = EUR 2,500

Advantages and disadvantages of the residual value method

advantages - the exact illustration of the depreciation process

disadvantage - the more complex calculation and the uneven interest rates

Summary

  • determines the average imputed interest per year on capital tied up in assets
  • Calculation is compared to Average value method more complicated, but more precise due to the annual observation
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Synonym for / Other word for

  • residual value method

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