Elect 7 - Midterm Lesson 3
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Questions and Answers

At what levels are general economic data collected?

  • Neighborhood, city, regional, and national levels (correct)
  • Regional and international levels
  • Neighborhood and city levels
  • National and international levels

    • What type of data is gathered and examined in the valuation process?

  • Government and environmental data
  • Economic and social data
  • Property-specific and environmental data
  • Property-specific, social, economic, government, and environmental data (correct)

    • Why is the concept of Highest and Best Use important in valuation?

  • It determines the property's market value
  • It determines the optimal use of the property (correct)
  • It determines the property's physical characteristics
  • It determines the property's supply and demand

    • How many valuation approaches are recognized in many countries?

    <p>Three</p> Signup and view all the answers

    What principle is the basis for the valuation approaches?

    <p>Principle of Substitution</p> Signup and view all the answers

    What is the Sale Comparison or Market Data Approach based on?

    <p>The Principle of Substitution</p> Signup and view all the answers

    What does the Income Capitalization Approach perceive value as?

    <p>Created by the expectation of future benefits</p> Signup and view all the answers

    What is the purpose of analyzing supply and demand data?

    <p>To develop an inventory of properties that compete with the subject property</p> Signup and view all the answers

    What is the most common approach used in the Philippines for machinery and equipment valuations?

    <p>Cost Approach (Depreciated Replacement Cost)</p> Signup and view all the answers

    Why is the Income Capitalization Approach not commonly used in the Philippines for valuing machinery and equipment?

    <p>It is rarely possible to identify an income stream and allocate it to individual assets</p> Signup and view all the answers

    What is the primary basis for using the Depreciated Replacement Cost method in the Philippines?

    <p>Due to the IVS seventh edition (2005) recognizing it as market-based</p> Signup and view all the answers

    How are plant machinery and equipment valued in the Philippines?

    <p>As part of the business as a going concern, in-situ</p> Signup and view all the answers

    What is 'Value for Continued Use' equivalent to in the Philippines?

    <p>Value for Continued Use</p> Signup and view all the answers

    Why are values not intended to represent the amount realized from piecemeal disposition of the property in the marketplace?

    <p>Due to the assumption of continued use</p> Signup and view all the answers

    What does the Depreciated Replacement Cost method consider in its valuation conclusion?

    <p>The test of adequate profitability</p> Signup and view all the answers

    What is the equivalent of 'Liquidation Value' in the Philippines?

    <p>Plant, machinery, and equipment valued as individual items for removal from their current location</p> Signup and view all the answers

    What is the primary objective of the Guidance Note (GN) in personal property valuations?

    <p>To improve the consistency and quality of personal property valuations</p> Signup and view all the answers

    What is the principle underlying the cost approach to valuation?

    <p>The principle of substitution</p> Signup and view all the answers

    Which of the following is NOT a method of the income approach to intangible asset valuation?

    <p>Cost Approach</p> Signup and view all the answers

    What is the purpose of estimating cash receipts in the Discounted Cash Flow (DCF) method?

    <p>To calculate the present value of anticipated benefits</p> Signup and view all the answers

    What is the basis of valuation commonly used in personal property valuations?

    <p>Market Value</p> Signup and view all the answers

    What is the output of the (direct) capitalization of income method?

    <p>A capitalized value of income</p> Signup and view all the answers

    What is the consideration when applying different bases of valuation in personal property valuations?

    <p>Proper disclosure and explanation</p> Signup and view all the answers

    What is the characteristic of the income approach to intangible asset valuation?

    <p>Estimates the present value of anticipated benefits</p> Signup and view all the answers

    What is the basis of the Valuer's estimate in the Cost Approach?

    <p>Reproduction or replacement cost of the subject property</p> Signup and view all the answers

    What is the primary difference between replacement cost and reproduction cost?

    <p>Replacement cost is based on the cost of a similar item, while reproduction cost is based on an exact copy</p> Signup and view all the answers

    What is the ultimate goal of the valuation process?

    <p>To estimate the value of the subject property</p> Signup and view all the answers

    What is the role of the Valuer in the valuation process?

    <p>To use judgement when determining the relative weight to be given to each of the value estimates</p> Signup and view all the answers

    What is the importance of distinguishing between the value of a business entity and the valuation of its assets?

    <p>It is necessary to avoid confusion and ensure accurate valuation</p> Signup and view all the answers

    What should the Valuer provide when requested?

    <p>The rationale and justification for the valuation methods used and the weighting of the method relied on</p> Signup and view all the answers

    What is the primary difference between business valuation and real property valuation?

    <p>Business valuation involves the valuation of assets, while real property valuation involves the valuation of property interests</p> Signup and view all the answers

    What is the purpose of the Cost Approach in personal property valuation?

    <p>To estimate the reproduction or replacement cost of the subject property</p> Signup and view all the answers

    What is essential to understand when estimating the physical life of an asset?

    <p>The asset's environment and function</p> Signup and view all the answers

    What is the purpose of estimating functional obsolescence in asset valuation?

    <p>To identify potential changes that may affect the asset's value</p> Signup and view all the answers

    What is Discounted Cash Flow (DCF) Analysis used for?

    <p>For valuation of real property, business, and intangible assets, as well as investment analysis</p> Signup and view all the answers

    What is the role of the discount rate in DCF Analysis?

    <p>To reflect the return on invested capital and the return of the original investment</p> Signup and view all the answers

    What is involved in DCF Analysis?

    <p>Projecting a series of periodic cash flows</p> Signup and view all the answers

    What is essential to have when estimating the value of an asset?

    <p>Familiarity with the class of property through access to available market data</p> Signup and view all the answers

    What is the outcome of applying a discount rate in DCF Analysis?

    <p>An indication of the present value of the income stream</p> Signup and view all the answers

    What is a type of analysis that DCF Analysis is part of?

    <p>Income approach</p> Signup and view all the answers

    The Income Capitalization Approach is commonly used in the Philippines for valuing machinery and equipment.

    <p>False</p> Signup and view all the answers

    The Depreciated Replacement Cost method is a market-based methodology.

    <p>True</p> Signup and view all the answers

    Values derived from the Depreciated Replacement Cost method represent the amount that might be realized from piecemeal disposition of the property in the marketplace.

    <p>False</p> Signup and view all the answers

    Plant machinery and equipment are valued separately in the Philippines.

    <p>False</p> Signup and view all the answers

    The Depreciated Replacement Cost method considers the test of adequate profitability.

    <p>True</p> Signup and view all the answers

    Valuation conclusions using the Depreciated Replacement Cost method are subject to market data evidence.

    <p>False</p> Signup and view all the answers

    In the Philippines, 'Value for Continued Use' is equivalent to 'Liquidation Value'.

    <p>False</p> Signup and view all the answers

    The Depreciated Replacement Cost method is the most common approach used in the Philippines for machinery and equipment valuations.

    <p>True</p> Signup and view all the answers

    The valuation of intangible assets is similar to the valuation of other types of assets.

    <p>True</p> Signup and view all the answers

    Intangible assets are only valued for acquisition and disposition purposes.

    <p>False</p> Signup and view all the answers

    The market approach to intangible asset valuation compares the subject to similar intangible assets or ownership interests that have been sold in the closed market.

    <p>False</p> Signup and view all the answers

    The valuer of intangible assets must rely solely on information provided by the client.

    <p>False</p> Signup and view all the answers

    The earnings capacity of an intangible asset is not a factor to be considered in its valuation.

    <p>False</p> Signup and view all the answers

    Intangible value is only contained in clearly differentiated assets.

    <p>False</p> Signup and view all the answers

    Prior transactions in the ownership interest of the subject intangible assets are not relevant to its valuation.

    <p>False</p> Signup and view all the answers

    The rights and privileges granted to the owner of intangible assets are not relevant to its valuation.

    <p>False</p> Signup and view all the answers

    The Cost Approach seeks to establish the cost of an alternative example or of a replica, or copy, of the original item, as near as possible to the original in terms of nature, quality, and age of materials but with modern construction methods.

    <p>False</p> Signup and view all the answers

    The Valuer should not provide the rationale and justification for the valuation methods used and for the weighting of the method relied on in reaching the value reconciliation.

    <p>False</p> Signup and view all the answers

    The concepts, process, and method applied in the valuation of business are entirely different from those for other types of valuations.

    <p>False</p> Signup and view all the answers

    The Valuer uses judgement when determining the relative weight to be given to each of the value estimates during the valuation process.

    <p>True</p> Signup and view all the answers

    Reproduction cost refers to one might expect to pay for an object of similar age, size, color, and condition.

    <p>False</p> Signup and view all the answers

    The selection of an approach, method, and procedures does not depend on the judgement of the valuer.

    <p>False</p> Signup and view all the answers

    The Valuer must not use judgement when determining the relative weight to be given to each of the value estimates during the valuation process.

    <p>False</p> Signup and view all the answers

    The value conclusion should not be based on value estimates from the valuation methods performed.

    <p>False</p> Signup and view all the answers

    The Valuation Properties process is unique to the Philippines and is not used in other countries.

    <p>False</p> Signup and view all the answers

    The definition of the assignment includes an identification of the real estate involved in the valuation and the intended use of valuation.

    <p>True</p> Signup and view all the answers

    The preliminary analysis and data collection and selection step is the final step in the valuation process.

    <p>False</p> Signup and view all the answers

    The date of the intended report is not included in the definition of the assignment.

    <p>False</p> Signup and view all the answers

    The scope of the valuation is not included in the definition of the assignment.

    <p>False</p> Signup and view all the answers

    The valuation of lease interests is not a type of valuation guidance note.

    <p>False</p> Signup and view all the answers

    The valuation of intangible assets does not include the rights and privileges granted to the owner of intangible assets.

    <p>False</p> Signup and view all the answers

    The business valuation is the same as the valuation of its assets.

    <p>False</p> Signup and view all the answers

    The Depreciated Replacement Cost method is a market-based methodology.

    <p>False</p> Signup and view all the answers

    Functional obsolescence can be caused by changes in supply and demand.

    <p>True</p> Signup and view all the answers

    External factors include the cost of operation of the asset.

    <p>True</p> Signup and view all the answers

    The Valuer estimates the cost of a modern equivalent asset at the relevant valuation date and then estimates depreciation.

    <p>True</p> Signup and view all the answers

    Depreciation rates are always all-encompassing.

    <p>False</p> Signup and view all the answers

    The application of optimization process accounts for many elements of physical deterioration.

    <p>False</p> Signup and view all the answers

    The Valuer ensures that the key elements of a market transaction have been considered in the application of depreciated replacement cost.

    <p>True</p> Signup and view all the answers

    The Depreciated Replacement Cost method is based on the cost of reproducing a new asset with the same specifications as the original asset.

    <p>False</p> Signup and view all the answers

    In the Philippines, the sales comparison approach is often limited to individual free-standing machines such as ______ and generators.

    <p>lathes</p> Signup and view all the answers

    The ______ Capitalization Approach is not commonly used in the Philippines for valuing machinery and equipment.

    <p>Income</p> Signup and view all the answers

    The ______ Replacement Cost Approach is the most common method used in the Philippines for machinery and equipment valuations.

    <p>Depreciated</p> Signup and view all the answers

    Plant machinery and equipment are valued as a whole, in-situ and as part of the business as a ______ concern.

    <p>going</p> Signup and view all the answers

    The values derived from the Depreciated Replacement Cost method are not intended to represent the amount that might be realized from piecemeal disposition of the property in the ______place.

    <p>market</p> Signup and view all the answers

    The Depreciated Replacement Cost method is recognized as a ______-based methodology.

    <p>market</p> Signup and view all the answers

    'Value for Continued Use' in the Philippines assumes the property is in continued use for the purpose for which the property was designed and ______, or to which it is currently adapted.

    <p>built</p> Signup and view all the answers

    Plant, machinery and equipment valued as individual items for removal from their current location equates to '______' Value in the Philippines.

    <p>Liquidation</p> Signup and view all the answers

    Personal _______________ Valuers must frequently rely upon information received from a client or from a client’s representatives.

    <p>Property</p> Signup and view all the answers

    The sales comparison approach compares the subject property to similar properties and/or property ownership interests that have been _______________ in open markets.

    <p>sold</p> Signup and view all the answers

    Factors to be considered by the Personal Property Valuer include the nature of the property and history of its _______________.

    <p>ownership</p> Signup and view all the answers

    The economic outlook that may affect the subject property, including _______________ outlook and government policy, are considered.

    <p>political</p> Signup and view all the answers

    The condition and outlook of a market specific to the trade of personal properties that may affect the subject property are considered.

    Signup and view all the answers

    The two most common sources of data used in the comparison approach are published _______________ results and transactions reported by firms regularly engaged in the trade of similar properties.

    <p>auction</p> Signup and view all the answers

    The sales comparison approach compares the subject property to similar properties and/or property ownership interests that have been _______________ in open markets.

    <p>sold</p> Signup and view all the answers

    The Valuer shall take _______________ to assure that all data sources relied upon are reliable and appropriate to the valuation undertaking.

    <p>steps</p> Signup and view all the answers

    Valuers are expected to ______________________ correctly apply those recognized methods and techniques that are necessary to comply with this Guidance.

    <p>the</p> Signup and view all the answers

    When valuing property subject to some hazardous or toxic substance that adversely influences property value, the Valuer should apply those ______________________ necessary to adequately reflect any such value losses.

    <p>process</p> Signup and view all the answers

    In Market Value engagement, it is the valuer’s responsibility to reflect the market effect of the particular ______________________ or circumstance.

    <p>condition</p> Signup and view all the answers

    The Cost Approach for Financial Reporting – ______________________.

    <p>DRC</p> Signup and view all the answers

    DRC is an application of the cost approach that may be used in arriving at the value of specialized assets for ______________________ purposes.

    <p>financial reporting</p> Signup and view all the answers

    The current cost of replacing an asset with its modern equivalent asset less deduction for physical deterioration and all relevant forms of ______________________ and optimization.

    <p>obsolescence</p> Signup and view all the answers

    The purpose of this Guidance Note (GN) is to assist user and prepares of Valuation Reports in the interpretation of the meaning and application of Depreciated Replacement Cost (DRC) for ______________________ purposes.

    <p>financial reporting</p> Signup and view all the answers

    DRC may be the more applicable approach when comparable sales data is insufficient but sufficient market data exists concerning ______________________ and accrued depreciation.

    <p>costs</p> Signup and view all the answers

    The Depreciated Replacement Cost (DRC) is commonly known as ______________________

    <p>Reproduction Cost New Less Depreciated</p> Signup and view all the answers

    Depreciation rates may ______________________ or analyzed separately for physical deterioration, functional obsolescence, and external obsolescence

    <p>be all-encompassing</p> Signup and view all the answers

    These include an understanding of the asset, its function and its ______;

    <p>environment</p> Signup and view all the answers

    Functional obsolescence can be caused by advances in ______________________ that result in new assets being capable of a more efficient delivery of goods and services

    <p>technology</p> Signup and view all the answers

    External factors that affect the value of assets include change in ______________________ conditions, which affect the supply and demand for goods and services produced by the assets

    <p>economic</p> Signup and view all the answers

    Knowledge of changes in references, technical innovations, and/or market standard that may affect the asset is used to estimate ______;

    <p>functional obsolescence</p> Signup and view all the answers

    Discounted Cash Flow (DCF) Analysis is a financial modeling technique based on explicit assumptions regarding the prospective ______ and expenses of a property or business;

    <p>income</p> Signup and view all the answers

    In the application of depreciated replacement cost, the Valuer shall ensure that the key elements of a ______________________ transaction have been considered

    <p>market</p> Signup and view all the answers

    In estimating the physical deterioration of the actual asset resulting from ______________________ and tear over time, including any lack of maintenance

    <p>wear</p> Signup and view all the answers

    In DCF Analysis, an appropriate, market-derived ______ is applied to establish an indication of the present value of the income stream;

    <p>discount rate</p> Signup and view all the answers

    External factors that affect the value of assets also include the cost and reasonable availability of ______________________, utilities, and labor

    <p>raw materials</p> Signup and view all the answers

    The rate in DCF Analysis reflects both the return on the invested capital and the return of the original ______;

    <p>investment</p> Signup and view all the answers

    The Valuer estimates the cost of a modern equivalent asset at the relevant ______________________ date

    <p>valuation</p> Signup and view all the answers

    DCF Analysis is one of the accepted methodologies within the ______ approach to valuation;

    <p>income capitalization</p> Signup and view all the answers

    DCF Analysis is applied in valuations of real property, business and ______ assets;

    <p>intangible</p> Signup and view all the answers

    The ultimate goal of the valuation process is to determine the ______ of the asset;

    <p>value</p> Signup and view all the answers

    Match the following types of properties with their corresponding valuation methods:

    <p>Operating Real Properties = Gross income less vacancy and collection losses and less operating expenses/outgoings Development Properties = Estimated capital outlays, development costs, and anticipated sale income Businesses = Estimate of periodic cash flows and the value of the business at the end of the projection period Agricultural Properties = Reliable valuation of agricultural land based on physical and economic elements</p> Signup and view all the answers

    Match the following concepts with their corresponding uses in valuation:

    <p>Highest and Best Use = Determining the most profitable use of a property Sale Comparison or Market Data Approach = Estimating value based on similar properties Income Capitalization Approach = Estimating value based on expected income Depreciated Replacement Cost method = Estimating value based on replacement cost minus depreciation</p> Signup and view all the answers

    Match the following valuation approaches with their corresponding underlying principles:

    <p>Cost Approach = The principle of substitution Income Capitalization Approach = The principle of anticipation Market Data Approach = The principle of supply and demand Discounted Cash Flow (DCF) Analysis = The principle of time value of money</p> Signup and view all the answers

    Match the following concepts with their corresponding application in valuation:

    <p>Liquidation Value = Estimated amount realized from piecemeal disposition of the property in the marketplace Value for Continued Use = Estimated value of a property for continued use Discount Rate = The rate used to discount future cash flows to their present value Physical Life = Estimated useful life of an asset</p> Signup and view all the answers

    Match the following valuation methods with their corresponding types of properties:

    <p>Cost Approach = Personal property valuation Income Capitalization Approach = Income-producing properties Market Data Approach = Real estate valuation Discounted Cash Flow (DCF) Analysis = Business valuation</p> Signup and view all the answers

    Match the following concepts with their corresponding roles in valuation:

    <p>Valuer = Estimating value based on analysis of market data Market Data = Evidence used to estimate value Capitalization Rate = Rate used to convert income into value Discount Rate = Rate used to discount future cash flows</p> Signup and view all the answers

    Match the following concepts with their corresponding importance in valuation:

    <p>Supply and Demand = Understanding market conditions Physical Life = Estimating useful life of an asset Functional Obsolescence = Estimating loss of value due to age or obsolescence Test of Adequate Profitability = Evaluating feasibility of a project</p> Signup and view all the answers

    Match the following concepts with their corresponding applications in agriculture:

    <p>Agricultural Land = Valuation of lands devoted to agricultural use Valuation Services = Multiple purposes including private and public transfer of ownership, taxation, and financing Production Capacity = Estimating productive capacity of agricultural lands Reversion Value/Exit Value = Estimated value at the end of the projection period</p> Signup and view all the answers

    Match the following valuation methods with their corresponding benefits:

    <p>Discounted Cash Flow (DCF) Analysis = Provides estimate of present value of future cash flows Cost Approach = Provides estimate of replacement cost of an asset Income Capitalization Approach = Provides estimate of value based on expected income Market Data Approach = Provides estimate of value based on comparable sales</p> Signup and view all the answers

    Match the following concepts with their corresponding importance in business valuation:

    <p>Cash Flow = Estimating projected income and expenses Discount Rate = The rate used to discount future cash flows Gross Income = Estimating revenue before vacancy and collection losses Reversion Value/Exit Value = Estimated value at the end of the projection period</p> Signup and view all the answers

    Study Notes

    General Overview of Valuation

    • Valuation data can be collected at various levels, including neighborhood, city, regional, national, and international levels
    • Factors influencing value include social, economic, government, and environmental factors

    Property-Specific Data

    • Property-specific data is collected to better understand the specific property being valued and comparable properties
    • Data is gathered on supply and demand characteristics of the most probable market for the property

    Highest and Best Use (HABU)

    • HABU is used to determine the optimal use of a property
    • Physical similarities between properties do not necessarily mean similar uses
    • HABU is a foundation for determining market value

    Valuation Approaches

    • Three valuation approaches are recognized in the valuation process:
    • Sale Comparison or Market Data Approach
    • Income Capitalization Approach
    • Cost Approach (Depreciated Replacement Cost)

    Sale Comparison or Market Data Approach

    • Recognizes that property prices are determined by the market
    • Market value can be calculated from a study of market prices for competing properties

    Income Capitalization Approach

    • Based on the principle that value is created by the expectation of future benefits (income stream)
    • Not commonly used in the Philippines due to lack of direct sales evidence

    Cost Approach (Depreciated Replacement Cost)

    • Used in the Philippines for valuing machinery and equipment
    • Recognized as a market-based methodology since the publication of IVS 7th edition (2005)

    Valuation of Plant, Machinery, and Equipment

    • Valued as a whole, in-situ, and as part of the business as a going concern
    • Equates to Value for Continued Use in the Philippines
    • Can also be valued as individual items for removal, equating to Liquidation Value

    Income Capitalization Approach to Intangible Asset Valuation

    • Estimates the value of an intangible asset by calculating the present value of anticipated benefits
    • Two common methods: direct capitalization of income and discounted cash flow analysis (DCF)

    Cost Approach to Intangible Asset Valuation

    • Also known as the adjusted asset approach
    • Estimates the cost of replacing an asset, including developer's profit
    • Must be performed using knowledge possessed of the valuation date

    Personal Property Valuation

    • Objective is to improve the consistency and quality of personal property valuations
    • Valuations are commonly performed on a Market Value basis, applying PVS 1
    • Other bases of valuation may be used, applying PVS 2, with proper disclosure and explanation

    Business Valuation

    • Concepts, process, and methods applied are the same as those for other types of valuations
    • Care must be taken to distinguish between the value of a business entity, trade-related property, and various possible applications of business or going concern considerations

    Discounted Cash Flow (DCF) Analysis

    • A financial modeling technique applied in valuations of real property, business, and intangible assets
    • Involves projecting periodic cash flows and applying a market-derived discount rate to establish the present value of the income stream

    Philippine Valuation Standards

    • The valuation process is based on Generally Accepted Valuation Principles and is applied in many countries.
    • The process involves:
      • Definition of the assignment: identifying the real estate involved, property rights, intended use, and limitations.
      • Preliminary analysis and data collection: understanding the general market and subject property.
      • Selection of valuation approaches: Cost Approach, Income Capitalization Approach, and Depreciated Replacement Cost Approach.

    Real Property Valuation

    • The valuation process is the same as for other types of valuations.
    • The Cost Approach is commonly used for machinery and equipment valuations in the Philippines.
    • The Depreciated Replacement Cost Approach is regarded as a market-based method in the absence of direct market evidence.

    Valuation of Plant, Machinery, and Equipment

    • Valuation is typically carried out using the Depreciated Replacement Cost Approach.
    • Plant, machinery, and equipment are valued as a whole, in-situ, and as part of the business as a going concern.
    • The value conclusion is subject to the test of adequate profitability.

    Valuation of Intangible Assets

    • The concepts, process, and methods applied are the same as those for other types of valuations.
    • Intangible assets include rights, privileges, or conditions that attach to ownership interest.
    • Factors to be considered include:
      • Earnings capacity
      • Remaining economic life and/or legal life of the intangible assets
      • The nature and history of the intangible assets
      • Economic outlook
      • Prior transactions in ownership interest
    • Intangible asset valuation approaches include:
      • Market (sales comparison) approach
      • Cost Approach

    Personal Property Valuation

    • Valuation is performed using the Cost Approach.
    • The Valuer estimates the reproduction or replacement cost of the subject property or asset.
    • Replacement cost refers to the cost of an object of similar age, size, color, and condition.
    • Reproduction cost refers to the cost of a facsimile or exact copy of the original item.

    Business Valuation

    • The concepts, process, and methods applied are the same as those for other types of valuations.
    • Care should be taken to distinguish between the value of a business entity, the valuation of assets owned by such entity, and various possible applications of business or going concern considerations.

    Depreciated Replacement Cost (DRC)

    • DRC is commonly known as Reproduction Cost New Less Depreciated (RCNLD).
    • In the absence of sufficient direct market evidence, DRC is regarded as an acceptable method of arriving at the value of specialized assets.
    • The Valuer estimates the cost of a modern equivalent asset at the relevant valuation date and estimates depreciation by comparing the modern equivalent asset with the asset being valued.
    • Depreciation rates may be all-encompassing or analyzed separately for physical deterioration, functional obsolescence, and external obsolescence.

    Valuation of Machinery and Equipment in the Philippines

    • The sales comparison approach is often limited to individual free-standing machines, motor vehicles, and lathes and generators due to the lack of direct sales evidence.
    • The Income Capitalization Approach is not commonly used in the Philippines for valuing machinery and equipment.
    • The Cost Approach, specifically the Depreciated Replacement Cost (DRC) method, is the most widely used method for valuing machinery and equipment in the Philippines.

    Depreciated Replacement Cost (DRC) Method

    • DRC is a market-based methodology that determines the current cost of replacing an asset with its modern equivalent, minus depreciation for physical deterioration, functional obsolescence, and external obsolescence.
    • DRC is commonly known as Reproduction Cost New Less Depreciated (RCNLD).
    • In the absence of sufficient direct market evidence, DRC is regarded as an acceptable method of arriving at the value of specialized assets.
    • The Valuer estimates the cost of a modern equivalent asset and then estimates depreciation by comparing the modern equivalent asset with the asset being valued.

    Depreciation

    • Depreciation rates may be all-encompassing or analyzed separately for physical deterioration, functional obsolescence, and external obsolescence.
    • Physical deterioration results from wear and tear over time, including lack of maintenance.
    • Functional obsolescence can be caused by advances in technology, resulting in new assets being capable of more efficient delivery of goods and services.
    • External obsolescence results from external influences, including changes in economic conditions, supply and demand for goods and services, and cost of operation.

    Valuation of Personal Property

    • Personal property valuation may be performed using the Sales Comparison Approach, which compares the subject property to similar properties and/or property ownership interests that have been sold/offered in open markets.
    • The Cost Approach may also be used for personal property valuation, including the Depreciated Replacement Cost method.
    • Valuers must consider factors such as right privileges, or conditions that attach to the ownership of the subject property, the nature of the property and its history, previous sales or transfers, economic outlook, and market conditions.

    Discounted Cash Flow (DCF) Analysis

    • DCF Analysis is a financial modeling technique based on explicit assumptions regarding the prospective income and expenses of a property or business.
    • It is applied in valuations of real property, business, and intangible assets, as well as in investment analysis and as an accounting procedure to estimate value in use.
    • DCF Analysis involves the projection of a series of periodic cash flows, and an appropriate, market-derived discount rate is applied to establish an indication of the present value of the income stream associated with the property or business.

    Economic Data Collection

    • Economic data is collected at various levels: neighborhood, city, regional, national, and international.
    • Data collection involves examining social, economic, government, and environmental factors to understand the property's value.

    Property-Specific Data

    • Property-specific data is gathered and examined to better understand the property being valued and comparable properties.
    • Supply and demand data is analyzed to develop an inventory of properties that compete with the subject property for market share.

    Highest and Best Use (HABU)

    • The concept of HABU is used to determine the optimal use of a property, which is essential for determining its market value.
    • HABU considers the physical similarities and differences between parcels of real estate and their potential uses.

    Valuation Approaches

    • Three approaches are commonly used in the valuation process: Sale Comparison or Market Data Approach, Income Capitalization Approach, and Cost Approach.
    • Each approach is based on the Principle of Substitution, which states that the lowest-priced option attracts the greatest demand and widest distribution.

    Sale Comparison or Market Data Approach

    • This approach recognizes that property prices are determined by the market.
    • Market value is calculated by studying market prices for properties that compete with one another for market share.

    Income Capitalization Approach

    • This approach perceives value as created by the expectation of future benefits (income stream).
    • Valuation of Intangible Assets considers the rights, privileges, and conditions attached to the ownership interest, remaining economic life, earnings capacity, and economic outlook.

    Valuation of Intangible Assets

    • Intangible assets include the rights and privileges granted to the owner.
    • Valuation approaches include the Market Approach, which compares the subject to similar intangible assets or ownership interests.

    Intangible Asset Valuation Approaches

    • Market Approach: compares the subject to similar intangible assets or ownership interests.
    • The two most common sources of data used in the Market Approach are markets in which ownership interests of similar intangible assets are traded and prior transactions in the ownership of the subject intangible assets.

    Personal Property Valuation

    • Valuation is performed using the Cost Approach, which estimates the reproduction or replacement cost of the subject property or asset.
    • The value conclusion is based on value estimates from the valuation methods performed.

    Business Valuation

    • The concepts, process, and methods applied in business valuation are similar to those for other types of valuations.
    • Factors to be considered in business valuation include the rights, privileges, or conditions attached to the ownership interest, nature and history of the business, economic outlook, and asset, liabilities, and dividend-paying capacity.

    Income Capitalization Approach to Business Valuation

    • The income capitalization approach estimates the value of a business by calculating the present value of anticipated benefits.
    • The two most common income approach methods are Capitalization of Income and Discounted Cash Flow Analysis.

    Asset-Based Business Valuation Approach

    • This approach is founded on the principle of substitution, where an asset is worth no more than it would cost to replace all of its constituent parts.

    Discounted Cash Flow (DCF) Analysis

    • DCF analysis is used to estimate the value of operating real properties, development properties, and businesses.
    • The approach involves estimating periodic cash flows, discounting them, and calculating the present value.

    Valuation of Agricultural Properties

    • Reliable valuation of agricultural land is essential for ensuring the availability of capital, promoting productive use, and maintaining confidence in capital markets.
    • The valuer must have a sound knowledge and understanding of the physical and economic elements that affect the productive capacity of agricultural lands and the value of commodities produced.

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    Description

    This quiz covers the basics of real estate valuation, including the levels of data collection and factors influencing value. It also explores property-specific data and its importance in understanding the market.

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