Several distinct value concepts apply to assets at different points in their life. Keeping them straight matters because each goes in a different place in engineering-economic analysis.
Market value. What the asset would actually fetch in an open-market sale right now. Set by buyers and sellers in the second-hand market, not by any accounting rule. It can drift far from book value, especially for assets in fast-changing technology categories. For replacement analysis, the defender’s market value is the opportunity cost of keeping the asset — the cash you’d lose by not selling it now.
Book value. The asset’s value as it appears on the company’s books, derived from its original cost minus accumulated depreciation. An accounting construct that follows whichever depreciation model the company uses (SL or DB). Book value usually approximates market value but doesn’t equal it — accounting depreciation schedules are simplifications, not market measurements.
Salvage value. The actual or estimated cash value of the asset at the end of its planned useful life. Used in PW and AW calculations as the inflow at end-of-project. Often given as a forecast or assumed value rather than a known one.
Scrap value. The asset’s value at the end of its physical life (well past its useful life), when it’s effectively just material to be recycled or melted down. A car’s scrap value is a few hundred dollars for the metal once it’s no longer worth driving or selling for parts.
The four are usually ordered:
(Sometimes book value drops below salvage value temporarily because the depreciation schedule is too aggressive — that’s an accounting artifact, not a market signal.)
Why the distinction matters in analysis:
- In a PW calculation, use salvage value at the project endpoint — it’s the cash that will come in.
- In a Replacement decision, use the defender’s current market value (its opportunity cost). The defender’s original purchase price is a Sunk cost — ignore it. The defender’s book value matters only for tax purposes (it’s the basis for any gain or loss on disposal, which affects taxes paid).
- In tax calculations, the undepreciated capital cost (UCC) is the tax book value, which is separate from and different from both market value and the company’s accounting book value. UCC follows CRA-mandated CCA rules, not GAAP.
For the depreciation models that generate book value, see Straight-line depreciation, Declining balance depreciation. For the tax-specific version, see Undepreciated capital cost and Capital cost allowance.