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Main issues
A. B. The General Framework of Property Valuation The Valuation Process
C.
D. E. F. H. I.
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
Value is an economic concept which refers to the price agreed by the seller and buyer of a good or service, available for buying. an estimation of the price most likely to be paid Value is created and supported by the interaction of four factors:
The first two factors represent the supply and the last two
factors represent the demand.
The IVS 2 Valuation basis different from the market value presents 10 types of value which are
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 creditului ipotecar); Depreciated Replacement Cost (DRC) (costul de inlocuire net).
The
Cost represents the amount previously paid by the buyer for goods or services, or the amount needed to create or produce the good or service. Valuation Standards consider the Depreciated Replacement Cost as both:
The
E. Types of Property
Land, buildings, constructions, natural resources associated with the land, additional properties
Movable goods
Machinery, tools and equipment, inventory items, furniture, intangible distinct assets
Commercial companies, hotels, gas stations, restaurants, theatres and cinema Shares, other financial instruments
Financial assets
F. Valuation Standards
The
National Association of Romanian Evaluators (ANEVAR) adopted the International Valuation Standards, starting January 1, 2004. serve as guidance for valuators all over the world
IVS
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:
1.
Compounding
the compound interest technique, through which a future value is calculated.
V0 a present amount (initial capital) K the desired profitability rate Vn the future amount (from a future year)
Vn V0 1 K
(1 + K)n
is called the compounding factor or the compound interest factor and it is used especially in the banking system.
Another way to calculate the future value is called the future value of an annuity.
(1 K) n - 1 Vn Ap x K
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.
Vn V0 (1 K) n , so V0 Vn (1 K)
n
or 1
V0 Vn
1 (1 K) n
(1 K) n
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 generates a 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.
V1 Vc C
Vc V1 M
M 1 C
The Gordon-Shapiro formula is applied when the revenue that is capitalized will increase perpetually with a constant annual rate (g).
V1 Vc (K - 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.
4.
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 the valuation date. The comparability of these indicators is thus ensured. The used instrument is an appropriate price index. in specialized individual assets valuation (especially fixed assets) in order to convert the historical cost into current prices, at the valuation date. The used instrument is an appropriate price index.
Consumer
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
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.
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;
H. Valuation Approaches
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)
H. Valuation Approaches
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)
H. Valuation Approaches
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
H. Valuation Approaches
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)