Book Value

  

A balance sheet term. It's what things are worth at liquidation. If you own a company with stuff like machines, equipment, and inventory (stuff you sell), you'll figure out what things are worth now and how much they decline in value each year. Book value helps you understand how much everything is worth right now if you suddenly need to liquidate (or are just applying for a business loan).

Example

Caterpillar Tractor bought a smelting stove to melt iron at high temperatures. They paid $10 million for it. It should last 20 years and then they can sell it for scrap for $2 million. Using advanced calculus, we can ascertain that it will have depreciated $8 million in the 20 years that they use it. Using arithmetic depreciation, it will have declined in value $8 million / 20 = $400,000 per year in value. By year 10 of having owned the smelting stove, it will have depreciated $4 million. The book value of that stove will be held on the balance sheet of CAT as $6 million.

Related or Semi-related Video

Finance: What is the Difference Between ...42060 Views

00:00

finance a la shmoop. what's the difference between market value and book

00:06

value? ever tried to sell sunscreen to a white Walker? yeah [zombie walks through snow]

00:11

probably won't make much money. want to know why? now learning about the

00:14

difference between market value and book value will tell it all. first market

00:18

value it's what the market thinks a stock or a bond or a home or a used car

00:23

or whatever is worth. the market the crowd the crazy people.

00:28

all right here's an example of market value gone wild in the 17th century [crowd then tulip pictured]

00:31

Denmark, they valued a single tulip at 10 grand and it didn't even give them a

00:36

triple espresso buzz. go figure. but that's how the market of buyers

00:40

valued that tulip so that's what that tulips market value was. that's what the

00:45

market said it was worth. Book value however is a completely different in a [man walks through art gallery]

00:50

somewhat more rational animal .book value is the dollar amount that a company can

00:54

point to which reflects an asset they physically own. imagine buying a tractor

01:00

factory for 80 million bucks. it depreciates in value 10 million dollars

01:03

a year for 4 years then depreciates that 2 million dollars a year after that. so

01:08

after five years that factories Book value ie the amount we're guessing its [chart showing depreciation]

01:13

value as actually being is 38 million dollars. but lo and behold the factory

01:18

itself is made of Valyrian steel .you know that stuff from Game of Thrones

01:22

that kills White Walkers. so after eight years and one white Walker invasion of

01:27

Chicago later you decide to sell the factory itself because well the stuff [zombies walk in front of skyscrapers]

01:31

it's built out of, that rare material, is suddenly worth a lot more than the

01:35

factory .now after eight years the book value of the factory might be 32 million

01:39

dollars, but some bitter on eBay of tractor companies offers you a hundred

01:43

million bucks! and you accept! that hundred million dollars was the market [man sits behind computer screen]

01:48

value of the tractor factory even though the book value said it was worth a whole

01:53

lot less. securities actually work the same way. they are traded regularly in a

01:57

market place and they reflect their market value even though the book value

02:02

at which they are held is often a lot less. and what about Chicago well let's [smiling man carries bags of cash]

02:06

just say no one's selling much sunscreen these days.

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