Which of the following formulas would calculate the net realizable value of a product?

What is NRV?

The Net Realizable Value (NRV) represents the profit realized from selling an asset, less the estimated sale or disposal costs.

In practice, the NRV method is most common in inventory accounting, as well as for calculating the value of accounts receivable (A/R).

How to Calculate Net Realizable Value (NRV)

The net realizable value (NRV) is used to appraise the value of an asset, namely inventory and accounts receivable (A/R).

Per GAAP accounting standards – specifically the principle of conservatism – the value of assets must be recorded on a historical basis in an effort to prevent companies from inflating the carrying value of their assets.

For instance, inventory is recognized on the balance sheet at either the historical cost or the market value – whichever is lower, so companies cannot overstate the inventory’s value.

NRV estimates the actual amount a seller would expect to receive if the asset(s) in question were to be sold, net of any selling or disposal costs.

Below are the steps to calculate the NRV:

• Step 1 → Determine the Expected Sale Price, i.e. the Fair Market Value
• Step 2 → Calculate the Total Costs Associated with the Asset Sale, i.e. Marketing, Advertising, Delivery
• Step 3 → Subtract the Sale or Disposal Costs from the Expected Sale Price

Net Realizable Value (NRV) Formula

The formula for calculating NRV is as follows:

Net Realizable Value (NRV) = Expected Sale Price – Total Sale or Disposal Costs

For example, let’s say a company’s inventory was purchased for $100 per unit two years ago but the market value is now $120 per unit.

If the associated costs with the sale of the inventory is $40, what is the net realizable value?

After subtracting the selling costs ($40) from the market value ($120), we can calculate the NRV as $80.

• NPV = $120 – $80 = $80

On the accounting ledger, an inventory impairment of $20 would then be recorded.

Net Realizable Value Calculator – Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

NRV Calculation Example

Suppose a manufacturing company has 10,000 units of inventory that it intends to sell.

The market value on a per-unit basis is $60, and the associated selling costs are $20 per unit, but 5% of the inventory is defective and requires repairs, which costs $5 per unit.

• Inventory Units = 10,000
• Market Sale Price = $60.00
• Cost of Repair = $20.00
• Cost of Selling = $5.00

Since 5% of the inventory is defective, that means 500 units require repairs.

• Defective Units = 500

The sale price per unit for the defective units – upon incurring the repair and selling costs – is $35.00 per unit.

• Sale Price Per Unit = $35.00

The NRV of the defective Inventory is the product of the number of defective units and the sale price per unit after the repair and selling costs.

• NRV = 500 × 35.00 = $17,500

The percentage of non-defective inventory units is 95%, so there are 9,500 non-defective units.

• Non-Defective Units = 9,500

To calculate the sale price per unit for the non-defective units, only the selling costs need to be deducted, which comes out to $55.00.

• Sale Price Per Unit = $55.00

We’ll multiply the number of non-defective units by the sale price per unit after selling costs, resulting in the NRV of non-defective inventory of $522,500

The net realizable value (NRV) of our hypothetical company’s inventory can be calculated by adding the defective NRV and the non-defective NRV, which is $540,000.

• Net Realizable Value (NRV) = $17,500 + $522,500 = $540,000