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Book value

The book value of an asset or group of assets is the price at which they were originally acquired, in many cases equal to purchase price. Book value is therefore relevant insofar as it forms the basis of various calculations e.g. of nominal capital gains (current value divided by book value), of amortized value (book value adjusted for depreciation) and of several financial ratios (e.g. price to book value [P/BV]).

Book value can be very different from the current price e. g the market capitalization of a firm. In service and high tech companies, book value is generally much lower than market capitalization, because the value assigned by the market is generally understood to be based on the discounted value of future earnings and takes account of factors such as the expertise of employees and the value of brands.

Book values can be misleading because for many purposes, e.g. individual investment decisions and business decisions in going concerns, historic cost and/or book value can be irrelevant to the decisions being made. That is, decisions should be based on current (replacement) costs and expected future developments.