Valuation Approaches and Methods for Tangible and Resource Assets
This domain tests method selection, the internal consistency of each method, and the reconciliation that explains why one conclusion was preferred.
Choosing and reconciling
- Cost, income and market approaches each answer a different question. Choose on the basis of data availability, asset type and the definition of value, not on habit.
- Cost suits specialised assets with no second-hand market. Income suits assets defined by their cash flow, including extractive assets. Market suits active, transparent sectors with genuine comparables.
- Reconcile by weighting with reasons, not by averaging. Explain what the secondary method corroborates and where the two diverge.
Method mechanics worth memorising
- DCF discipline: nominal cash flows with a nominal discount rate, real with real. Terminal value by Gordon growth requires growth below the discount rate, or use an exit multiple, never both.
- Residual land value: gross development value less construction, fees, contingency, marketing, finance and developer's profit leaves the land value.
- Straight-line capitalisation is valid only for a stabilised, reasonably perpetual or long-dated income stream.
Worked example
Residual appraisal: gross development value $20.0M; construction $12.0M; professional fees 10% of construction $1.2M; contingency 5% of construction plus fees $0.66M; marketing 3% of gross development value $0.6M; finance at 8% on 50% of costs for 1.5 years about $0.83M; developer's profit 20% of gross development value $4.0M. Total costs plus profit is $19.29M, so residual land value is about $0.71M before acquisition costs. Reasoning: profit is struck on value, not cost, and finance is charged on the average cost balance through the build period.
Traps
- Using an exit multiple and a perpetual growth rate in the same DCF.
- Deducting already-incurred sunk costs from a residual calculation.
- Capitalising income that already embeds an explicit growth allowance, double counting growth.
- Reporting one method only where the basis of value clearly requires corroboration.