Book value vs salvage value: what’s the difference?

Book value versus salvage value: an overview

Book value and salvage value are two different measures of value that have significant differences. Book value attempts to approximate the fair market value of a business, while salvage value is an accounting tool used to estimate depreciation amounts for tangible assets and to arrive at deductions for tax purposes.

Key points to remember

  • When valuing a business, there are several useful ways to estimate the value of its actual assets.
  • Book value refers to a company’s net proceeds to shareholders if all of its assets have been sold at market value.
  • Salvage value is the value of assets sold after recognition of depreciation over their useful life.

Book value

Book value (also known as net book value) is the total estimated value that would be received by shareholders of a company if it were to be sold or liquidated at any given time. It calculates the total assets of the business less intangible assets and liabilities. Book value is a measure that helps analysts and investors assess whether a stock is overvalued or undervalued relative to the company’s actual fair market value, an estimate of the price at which the company could be sold. Net book value can be very useful in assessing the profit or loss of a business over a period of time.

Salvage value

Salvage value is a tool used in accounting to estimate the value for which a tangible asset can be sold when it has reached the end of its useful life, in short, what the asset can be salvaged for when a business can no longer make sustainable use of it. of it. Salvage value is used to determine annual depreciation in accounting records, and salvage value is used to calculate depreciation expense on the tax return.

Salvage value can sometimes be just an estimate at best, or it can be specifically determined by a tax or regulatory agency, such as the Internal Revenue Service (IRS). Salvage value is used to calculate the year-to-year depreciation amounts on tangible assets and the corresponding tax deductions that a company is allowed to take for the depreciation of those assets.

Special considerations: liquidation value

A third consideration when valuing a company’s assets is the liquidation value. The liquidation value is the total value of the physical assets of a business if it were to close its doors and the assets sold. Liquidation value is the value of a business’s real estate, fixtures, equipment, and inventory. Intangible assets are excluded from the liquidation value of a company.

The liquidation value is generally less than the book value but greater than the salvage value. Assets continue to be valuable, but they are sold at a loss because they have to be sold quickly.

The liquidation value does not include intangible assets such as intellectual property, goodwill and brand recognition of a company. However, if a business is sold rather than liquidated, the liquidation value and intangible assets determine the going concern value of the business. Value investors look at the difference between a company’s market capitalization and its going concern value to determine if the company’s stock is a good buy right now.

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