Several value concepts apply to an asset at different points in its life, and each goes in a different place in an 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, its original cost minus accumulated depreciation. An accounting construct that follows whichever depreciation model the company uses (SL or DB). It usually approximates market value but doesn’t equal it, since 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 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 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.)
Where each one goes:
- In a PW calculation, use salvage value at the project endpoint, 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, so 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, separate from and different from both market value and the company’s accounting book value. UCC follows CRA-mandated CCA rules, not GAAP.