PP Valuation

7/30/2019 PP Valuation

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Valuation

Prof. Dr. Dan Dumitru Popescu


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Main issues

A. The General Framework of Property Valuation

B. The Valuation Process

C. The Value Concept

D. The Cost Concept

E. Types of Property

F. Valuation Standards

G. The Time Value of Money concept

H. Valuation Approaches

I. The Valuation Report


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A. The General Framewo rk of Prop erty Valuation

Valuation is the process of estimating value.

Valuation is the process ofdetermining a particulartype of value, of a particular type of property, at aparticular date, materialized in the valuation report.

Valuation goals:

property selling/acquisition/exchange

mergers

loan guaranteeing

litigation

taxation

insurance

recording in the financial statements


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B. The Valuat ion Proc ess

Stages in the Valuation Process:

Defining the Valuation Problem

identifying the property, the property rights, the intended

usage of the valuation, the value type and the valuation date.

The collection and analysis of relevant data/

information

Applying approach, methods, techniques and

procedures the appropriate valuation

Issuing the conclusions over the value

Drawing up the final valuation report


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Valueis an economic concept which refers to the price

agreed by the seller and buyer of a good or service,

available for buying.

an estimation ofthe price most l ikely to be paid

Value is created and supported by the interaction of fourfactors:

uti l i ty

rar i ty

needs

purch asing power

The first two factors represent the supply and the last two

factors represent the demand.


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Themarket valuerepresents the estimated amount

for which a property will be traded at the valuation date,between a determined buyerand a determined seller,

within a transaction with an objectively determined

price, after carrying on appropriate marketing activity,

where the parties acted fully aware, cautiously andwithout any constraints. The market value is

synonymous with the trade value. IVS 1

The IVS 2

Valuation basis different from the marketvalue presents 10 types of value which are

different from the market value


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Types of value different from the market value:

Value in use (valoare de utilizare);

Investment value (valoare de investitie sau subiectiva);

Going concern value (valoare de exploatare continua);

Insurable value (valoarea de asigurare); Assessed or taxable value (valoarea de impozitare sau de

impunere);

Salvage value (valoarea de recuperare);

Liquidation value (valoarea de lichidare sau de vanzare fortata);

Special value (valoarea speciala);

Mortgage lending value (valoarea de garantare a credituluiipotecar);

Depreciated Replacement Cost (DRC) (costul de inlocuire net).


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D. The Cost Con cept

The Costrepresents the amount

previously paid by the buyer for goods orservices, or the amount needed to create

or produce the good or service.

The Valuation Standards consider the

Depreciated Replacement Cost as both:

A valuation basis or type of value;

A valuation method.


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E. Types o f Property

Real estate property Land, buildings, constructions, natural resources associated with

the land, additional properties

Movable goods Machinery, tools and equipment, inventory items, furniture,

intangible distinct assets

Companies and properties assimilated with the

company

Commercial companies, hotels, gas stations,

restaurants, theatres and cinema

Financial assets

Shares, other financial instruments


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F. Valuation Standards

The National Association of Romanian

Evaluators (ANEVAR) adopted the

International Valuation Standards, starting

January 1, 2004.

IVS serve as guidance for valuators all

over the world


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G. The Time Value of Money Conc ept

an amount of money in hand today values more than the

same amount if received in the future

The time value of money concept includes the following

essential elements:

Compounding

Actualization Capitalization


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1. Compounding the compound interest technique, through which a future value

is calculated.

V0 a present amount (initial capital)

K

the desired profitability rateVn the future amount (from a future year)

(1 + K)n is called the compounding factor or the compoundinterest factor and it is used especially in the banking

system.

n0n K1VV


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G. The Time Value of Money Concept

Another way to calculate the future value is

called the future value of an annuity.

Vn = the future value

Ap = perpetual annuityK = the annual interest rate.

K1-K)(1xApVn

n


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2. Actualization the calculation of the present value of a future amount (which

reflects a payment or cashing in some money).

Actualization allows comparing and adding some amounts that are:

received or paid at different future dates

expressed in the same measuring unit.

Actualization Factor (the values are taken from financial tables)

K)(1

1

VV

orK)(1

VnV

so,K)(1VV

nn0

n0

n0n

nK)(1

1


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3. Capitalization the transformation of a future flow of revenues, in the nature of

a constant or increasing annuity with a constant annual rate

(g), into a present or actualized value of that flow of revenues

Vc = the actual value of the capital which generatesa perpetual future annual revenue (Van).

V1 = the perpetual future annual revenue in the

nature of a constant annuity (equal annual size).

C = capitalization rate.

M = multiplication coefficient of the future annual

revenue which is reproduced for infinity in annual

constant size.

C

VVc 1

MVVc 1

C

1M


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The Gordon-Shapiro formula is applied when the revenue that is

capitalized will increase perpetually with a constant annual rate (g).

V1 = the annual revenue at the end of the first future year,

so V1 = V0 x (1 + g)

g = the expected perpetual annual increase of the revenue

K = the actualization rate of the revenue

C = K g, so the capitalization rate is the difference between the

actualization rate and g.

g)-(K

VVc 1


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4. The Indexation Method(of revenues/costs/previous values)

Can be used in one of the following cases:

in business valuation in order to transform some

financial indicators of the previous periods (turnover,

expenses, profit, etc.) into current prices, at thevaluation date. The comparability of these indicators is

thus ensured. The used instrument is an appropriate

price index.

in specialized individual assets valuation (especiallyfixed assets) in order to convert the historical cost into

current prices, at the valuation date. The used

instrument is an appropriate price index.


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Consumer Price Indices (CPI) CPI measures the general evolution of the purchased

merchandises and of the services used by the population during

a certain period of time (current period), compared to a previous

period (base or reference period).CPI is structured in groups:

The food merchandise group

The non-food merchandises group

The services group

The inflation rate is calculated based on the CPI and

can be:

Monthly inflation rate

Average monthly inflation rate

Annual inflation rate

Inflation rate at the end of the year


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Valuation principles

Valuation is not an exact science. It is the estimation of

a type of value.

Every valuation has its own particularities and therefore

there are no identical valuations.

The market is the best source for value determination According to the substitution principle the maximum

price that a prudent investor is willing to pay is either:

the purchasing price of the land and the construction costs of

building a substitute property having the same utility; the market purchasing price of a property having identical utility;

the purchasing price of an alternative property which generates

an equivalent revenue, under the same risk conditions.


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H. Valuat ion A ppro aches

The three valuation approaches included in the

International Standards of Valuation are:

Cost approach (or based on assets in the

case of business valuation) - Sales comparison approach (or market

comparison)

Revenue approach(capitalization/revenues actualization)


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H. Valuat ion App roaches

Cost Approach Cost approach estimates the value by estimating the

purchase costs or the cost of building a new property,

having the same utility, or of adapting an old property

for the same use, excluding costs associated with the

building/adapting time. The cost approach is useful for estimating the value

of a building which is intended to be constructed, of

the special purpose properties and of other properties

that are not frequently marketed The usual method used with the cost approach is the

Net Replacement Cost (NRC)


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Sales Comparison Approach The sales comparison approach considers that the

prices used during market transactions could

represent a good base for estimating the value of a

property

The market value can thus be calculated after

studying the market prices of similar properties from

the same market segment

In order to make a direct comparison between a sold

comparable property and the evaluated property, the

evaluator should take into account possible

corrections


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Revenues Approach The revenue approach considers that the value is

created by the anticipated future benefits (revenue

flows)

This approach is especially important for the

properties that are bought and sold based on their

capacity of generating profits

The essence of this method consists of analyzing the

revenues and expenses of the evaluated property

Methods used:

Revenue Capitalization Method

Discounted Cash Flow Method (DCF)


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