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What is the difference between Book Value and Replacement Value?
In finance, assets are considered at their historical cost rather than present value. Therefore, the price gets depreciated over the years. Sometimes, book value represents net cost minus the amortized value. The book value of debt is represented at its outstanding amount.
The difference between book values of assets and liabilities is always equal to net worth or shareholders' funds. Net worth divided by the number of shares gives the value of book value per share. The book value considers cost rather than value. By value, it means the worth of an asset today in terms of its potential advantages and benefits. Book value may be applied to intangible assets too.
Replacement value gives the value of expenses to sell tangible assets of the company today to replace the assets with new items. Replacement value is hard to calculate because it is tough to estimate the current value of a company perfectly. Replacement value ignores the cost of intangible assets and the utility of all existing assets.
Note − Replacement cost is only applied to tangible assets, while book value may be associated with intangibles too.
Differences between Book Value and Replacement Value
The terms "book value" and "replacement value" represent two different concepts. Book value is a term mostly used in accounting, while replacement value is related more to insurance. Replacement value is hardly used in accounting.
Replacement value is an alternative way of measuring the cost of assets if they were to be replaced today. Replacement value is usually higher than book value as it does not subtract the depreciation.
Replacement value is the value that is equal to the price of the asset to be replaced in its working or last updated condition. Book value is concerned more with the present value with the depreciation of an asset that is in working condition or doesn't have a physical form.
The total depreciation in the case of replacement cost remains the same, while it changes in the case of book value.
Replacement costs are related more to the replacement of old assets with new ones while book value is concerned more with sales. In that sense, in the case of book value, the assets are completely sold according to book value while estimation is done in case of the replacement cost before replacement.
Note − Although book value and replacement value look like two sides of the same coin, they are different in most senses.
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