CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA) Become a Certified Financial Modeling & Valuation Analyst (FMVA)® CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. We hope you’ve enjoyed reading CFI’s explanation of Net Book Value. It makes for fairer and more accurate accounting records and helps to express a true approximation of the company’s total value. NBV is incredibly important for a company to know. Normally the NBV is significantly lower than the market value for the first few years of the asset’s useful life, as the asset is still in good working condition and retains its value. Depreciation is always accumulated, and netted against the asset to get the NBV. It’s also important to understand that NBV is affected by the depreciation method used by a company. Market value depends on supply and demand effects for the asset. Market value is another important metric however, NBV and market value typically aren’t equal. It is especially true when used to help give value to a company – either for the company’s own accounting records, if the company is considering liquidation, or if another company is considering taking over the business. Net book value is among the most common financial metrics around. In our example, the NBV of the logging company’s truck after four years would be $140,000. If the logging company purchased the truck for $200,000 and the truck depreciated $15,000 per year for 4 years, the calculation of NBV would look like below:Īccumulated Depreciation = $15,000 x 4 years = $60,000 Let’s put in the example of the logging truck mentioned above. Net Book Value = Original Asset Cost – Accumulated DepreciationĪccumulated Depreciation = Per Year Depreciation x Total Number of Years The formula for calculating NBV is as follows: When it reaches the end of its useful life, the NBV should be equal to its salvage value.
What all of the above means is that the NBV of an asset should decrease fairly steadily and predictably over the useful life of the asset. It may have a salvage value that will make it useful in another way such as being sold for scrap parts or metal. For example, consider a logging company that purchases a hauling truck. Some assets may have remaining value that can be derived after the end of their useful life. Salvage value is also known as scrap value is another factor to be considered. Salvage value Salvage Value Salvage value is the estimated amount that an asset is worth at the end of its useful life. (Every asset has a reasonable period of time over which it can be used or useful.)
When calculating NBV, the depletion or depreciation and any amortization of the asset’s value must be subtracted from the original cost over the course of the asset’s useful life. Over time, assets lose some of their value. Subtracting Depreciation/Depletion/Amortization NBV is calculated using the asset’s original cost – how much it cost to acquire the asset – with the depreciation, depletion, or amortization Amortization Amortization refers to the process of paying off a debt through scheduled, pre-determined installments that include principal and interest of the asset being subtracted from the asset’s original cost. Net book value (NBV) refers to the historical value of a company’s assets or how the assets are recorded by the accountant.
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