Net book value is a measure of how much an asset is worth. When a company makes a purchase, the purchase price is known as the item's book value. Over time, some items are worth less than they were when purchased. This is called depreciation, and NBV calculates the current worth of an item when depreciation is taken into account.
Note the purchase price of the asset. For example, a piece of machinery may be worth $5,000 at the time of purchase.
Note the lifespan of the item. Assume the machinery in Step 1 has an estimated lifespan of five years.
Calculate the amount of yearly depreciation. Divide the original cost by the length of life of the asset. In the example, $5,000 / 5 years = $1,000, so the yearly depreciation is $1,000.
Calculate the amount of depreciation for the amount of time in question. Multiply the yearly depreciation by the number of years you wish to calculate. In the example, the amount of depreciation after three years is $1,000 x 3 = $3,000.
Determine the NBV by subtracting the total amount of depreciation from the original value of the asset. In the example, $5,000 - $3,000 = $2,000, meaning the estimated NBV after three years is $2,000.
Tips & Warnings
- NBV cannot be precise, because it depends on estimated data about the depreciation of items in consideration.
- Ready Ratios: Net Book Value
- Principles of Corporate Finance; Richard A. Brealey
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