The Cost Method

 The cost method involves the determination of the size of the assets, which the company has managed to accumulate in a given period of time, based on the principle of substitution. An important point for this method is that the volume of assets must be higher than the expected amount of replacement. In determining the state of this way, experts take into account the volume of the market price.

His income method in the practice of property valuation is used in order to determine the total amount of income received by the company in the course of its work.

Considers the most common comparative approach to determine the size of the property, taking into account the size of the resources of the object with which the company is compared. Thus, experts find out which similar companies are on the market and set their approximate cost.

For this approach, such criteria of the company as location, environmental features of the area, the area of ​​the territory occupied, the presence of competitors and other important indicators are taken into account. Only on the basis of this information can similar enterprises be identified on the market and the size of their property can be established.

Most often, this approach is used for developed companies, and for relatively young firms it is not appropriate.

He cost approach considers the value of the object of evaluation from the point of view of the owner or seller and is based on past events, profitable – from the point of view of a potential buyer and is based on future events. Finally, the comparative (market) approach considers the value of the object on the basis of the actual agreements of both the seller and the buyer on the momentary value of objects similar to the estimated one.

Within each approach, there are several methods for determining the value, which may vary depending on the type of property being valued; the choice of method is determined by the evaluator independently. The correct choice of a method for evaluating a particular object is the key to its adequacy. With a developed market and information infrastructure, all three approaches theoretically should give the same estimate of the value of the object. However, this situation is quite rare, due to the imperfection of the Russian market.

The replacement cost expresses in cash the costs of reproducing improvements that have the same functional suitability as the object being evaluated, using modern standards, materials and design at current prices for investment resources. The replacement cost will not reflect the construction costs of the specified basement, since they do not recreate the modern consumer properties of the object.

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Application areas:

determination of the market value of new or relatively new buildings that have little wear and meet the most efficient use of the site;

Determining the market value of old properties with reliable information for calculating depreciation;

Determination of the market value of construction projects, determination of the market value of special-purpose objects;

Determination of the market value of objects with which market transactions are rarely concluded;

Determining the market value of real estate objects that cannot be assessed by income-based methods.

The cost approach is not advisable to use if the building is old, or does not represent the most effective way of using the site as undeveloped. In this case, it is difficult for the evaluator to reliably assess the physical, functional and external wear and tear of the structure.

The cost approach is difficult to use if there is no data available or heterogeneous data for estimating entrepreneurial profits. The cost approach will not provide the necessary reliability of the result, if the intermediate calculations are not checked by market data. Property valuation using the cost approach includes depreciation.

With the full achievement of functional, constructive and parametric similarity, it is customary to talk about the identity of objects, and with approximate and partial similarities – about similarity.

Cost, estimated on the basis of the cost approach, may differ significantly from the market value, since there is no direct connection between costs and utility. Nevertheless, there are quite a few cases when this approach is justified (for example, for the purpose of insuring individual components of a property, when court division of property between owners, when selling property at public auction, for accounting of fixed assets and when they are revalued). In Russia, where the stock market is only being formed and market information is almost absent, a cost approach is often the only possible one.

To understand the meaning of cost, determined on the basis of costs, consider the usual situation when a consumer wants to purchase a facility. In general, he has three possible actions:

 

 

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