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Approaches to Valuation There are three (3) basic approaches to value, the choice of which depends on the needs of the particular study and the type of asset. Market Approach The market approach attempts to compile and correlate data from the sale of similar assets. This approach is generally used for determining land values, transportation equipment and other assets like golf shares and shares of companies listed in the Philippine Stock Exchange which are easily bought or sold in the open market. Cost Approach The cost approach attempts to measure cost to recreate an asset in similar condition. This method first requires the estimation of all costs of the asset new (reproduction cost or replacement cost new) and then modifies the value to reflect the observed condition arising from physical depreciation, functional and economic obsolescence. Physical depreciation is proportional to use rather than age. This approach is more appropriately used for determining building values as well as highly specialized machineries and equipment. Income Approach The income approach is premised on the concept that the value of properties or businesses are equal to the net present value of the future benefits they are projected to generate for their owner. The process involves evaluating past performance and future prospects based on a market study to generate projected income, which is then converted to present value. This approach is ideal for determining economic value of assets and companies for investors. This approach is best used for companies with a history of performance but may also be used for start-ups, albeit with higher safety premiums for risk. This approach is by far the most sophisticated and time consuming but can yield a number of useful by-products such as efficiency, profitability, and other forms of economic and financial evaluation. The approach is very useful for corporate planning. |
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