CPV Asset Valuation Practice II cheat sheet

Income approach: value = expected benefit stream discounted to present value at a rate reflecting risk; the discount rate must match the benefit stream's definition (pre-tax vs after-tax, debt-inclusive vs equity-only).

Capitalization is a single-period shortcut: value = normalized benefit ÷ (discount rate − long-term sustainable growth rate); capitalization is valid only when growth is steady and perpetual.

Weighted average cost of capital: WACC = (E/V × Re) + (D/V × Rd × (1 − t)), where E and D are at market value and t is the marginal tax rate.

Capital asset pricing model: Re = Rf + β × ERP + size premium + company-specific premium; use a maturity-matched risk-free rate and unlever/relever beta to the subject's capital structure.

Market approach: guideline public company method yields minority, marketable value; guideline transaction method yields control value; adjust for control and marketability via discounts or premiums.

Normalize earnings by removing nonrecurring items, adjusting owner compensation to market, and restating accounting to a consistent basis before applying any multiple.

Enterprise value to equity value: subtract interest-bearing debt, preferred stock, and nonoperating liabilities; add cash and nonoperating assets; use the same date for all balance sheet inputs.

Excess earnings method: value = tangible asset value + capitalized excess earnings, where excess earnings = normalized earnings − required return on net tangible assets.

Control premium and minority discount are reciprocals: minority discount = 1 − [1 ÷ (1 + control premium)]; never apply both to the same base.

Cost approach for machinery: replacement cost new less physical deterioration, functional obsolescence, and economic obsolescence; depreciation is measured, not assumed by age alone.

Physical deterioration methods: age/life ratio, straight-line, and observed condition scoring; age/life percent = effective age ÷ (effective age + remaining economic life).

Functional obsolescence includes excess capital cost (new cost of an over-capable asset minus cost of the adequate asset) and excess operating cost capitalized at an appropriate rate.

Economic obsolescence is external: quantify by comparing subject earnings or utilization to a benchmark, or by the ratio of subject throughput capacity to demand.

Trending: replacement cost new = historical cost × (current index ÷ historical index); index selection must match asset class, geography, and installation vs bare cost.

Orderly liquidation value assumes a defined marketing period with normal exposure; forced liquidation assumes a shortened period and typically yields a lower value.

Fair market value in continued use includes installation, freight, and start-up costs; fair market value removed excludes them and reflects dismantling.

Highest and best use for a machine considers legal permissibility, physical possibility, financial feasibility, and maximum productivity - not just current use.

Useful life is the total service life from new; remaining economic life is the balance at the valuation date; effective age reflects actual wear and obsolescence.

Personal property is movable and tangible or intangible; fixtures are personal property that has become annexed to realty and is valued with the real property unless a lease or statute says otherwise.

Trade fixtures installed by a tenant generally remain the tenant's personal property and are removable if removal does not cause material damage to the realty.

Replacement cost new is the cost to acquire an equivalent new item of like utility; reproduction cost is the cost to recreate the identical item, typically higher for antiques and custom goods.

Valuation premises must be stated: in-place, installed, removed, liquidation, or scrap; each premise changes the cost base and the deduction structure.

Group valuation is appropriate when individual items are numerous and low value; sample and stratify, then extrapolate by class with documented sampling method.

Special-purpose items with no active secondary market rely on cost approach; general-purpose items with active markets favor sales comparison.

Salvage value is the amount expected on disposal of the item as-is; scrap value is the value of its material content only, and is usually lower.

Depreciation for personal property: physical deterioration is age/life based; functional and economic obsolescence must be documented separately, not folded into age.

The four Cs - cut, color, clarity, carat weight - drive diamond value; for colorless diamonds, color and clarity grades come from a recognized laboratory report, not from the appraiser's opinion alone.

Carat is a weight unit: 1 carat = 200 milligrams = 0.2 grams; 1 point = 0.01 carat; value per carat is not linear with size - larger stones command a premium per carat.

Clarity grades run FL, IF, VVS1–VVS2, VS1–VS2, SI1–SI2, I1–I3; color grades run D (colorless) through Z, then fancy colors are graded separately.

Colored stones are graded by hue, tone, and saturation; origin and treatment status (heat, fracture fill, diffusion) materially affect value and must be disclosed.

Pearls are valued on nacre thickness, luster, surface, shape, size, and color; natural vs cultured origin and freshwater vs saltwater are primary value drivers.

Precious metal content: fine weight = gross weight × fineness; 18K = 750/1000 fine, 14K = 585/1000, sterling silver = 925/1000; value = fine weight × spot price plus fabrication.

A jewelry appraisal should state the valuation purpose (insurance replacement, fair market value, liquidation), the testing methods used, and any gemological laboratory report relied upon.

Insurance replacement value reflects retail replacement cost new; estate or fair market value reflects what a willing buyer would pay, typically below retail.

Three approaches: sales comparison (most reliable for residential with active comparables), cost (special-purpose or new construction), and income (income-producing property).

Direct capitalization: value = net operating income ÷ capitalization rate; the cap rate must be derived from comparable sales with similar risk, location, and lease profile.

Gross rent multiplier: value = gross monthly or annual rent × GRM derived from comparable sales; valid only where expense ratios are similar across comparables.

Net operating income excludes debt service, income taxes, depreciation, and capital expenditures; it includes a market-based replacement reserve where typical.

Sales comparison adjustments: adjust the comparable to the subject; if the comparable is superior, subtract; if inferior, add; never adjust the subject.

Cost approach: value = replacement or reproduction cost new − physical deterioration − functional obsolescence − economic obsolescence + land value.

Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive; it is tested as vacant and as improved.

Reconciliation weighs the approaches by relevance and reliability of data; the final value is a supported point or range, not an average of the approaches.

Gross income multiplier uses gross income; net income multiplier uses net income; the inverse of a net income multiplier is the overall capitalization rate.

Review levels: administrative (completeness and compliance), technical (methodology and analysis), and field review (inspection and verification of subject and comparables).

Scope of work is determined by the intended use, intended user, and relevant characteristics of the assignment; the reviewer must confirm the scope was adequate for the conclusions.

Standards compliance review checks identification of the client and intended users, statement of purpose, definition of value, effective date, and signed certification.

Review findings are graded: pass, pass with comment, or fail; a reviewer must state whether the value conclusion is credible, not merely whether the report is well formatted.

For a value disagreement, the reviewer must develop independent support - additional comparables, corrected adjustments, or a reanalysis - before concluding a different value.

Appraisal management: engagement letters should define scope, fee basis, turnaround, data requirements, and independence; fee must not be contingent on the value conclusion.

Quality control sampling: define error types, sample size, and acceptance thresholds in advance; track revision rates and turnaround as management metrics.

Record retention and confidentiality: retain the workfile for the period required by law or engagement, and disclose confidential data only as authorized or legally required.

Free cash flow to the firm = EBIT × (1 − t) + depreciation − capital expenditures − increase in net working capital.

Free cash flow to equity = net income + depreciation − capex − Δ NWC + net borrowing.

Terminal value (Gordon growth) = FCF in final year × (1 + g) ÷ (discount rate − g); g must not exceed long-run nominal GDP growth.

Mid-year convention multiplies each period's cash flow by the discount factor at (t − 0.5), reflecting cash flows spread through the year.

Marketability discount estimated by restricted stock studies or pre-IPO studies; apply to the minority interest base, not to a control value.

Rules of thumb (e.g., multiples of revenue or EBITDA) are sanity checks only; they require adjustment for growth, margin, and risk differences.

Percent good = remaining economic life ÷ (effective age + remaining economic life), expressed as a percentage.

Obsolescence from excess operating cost = annual excess cost × present value factor for the remaining life, or ÷ capitalization rate.

Economic obsolescence percent = 1 − (subject's actual or achievable throughput ÷ design capacity), applied to cost less physical and functional depreciation.

Installation cost factor: installed cost = bare equipment cost × (1 + installation factor), where the factor covers freight, foundations, rigging, and start-up.

Sales comparison for machinery: adjust comparables for capacity, condition, age, accessories, and location, then reconcile to the subject.

Cost approach sequence: replacement cost new → physical deterioration → functional obsolescence → economic obsolescence → value.

Age/life depreciation percent = effective age ÷ total expected life; apply to the item's cost, then deduct obsolescence separately.

Bulk lot valuation: value the lot as a whole when individual sale is impractical; a bulk discount reflects reduced per-unit realization.

Auction results are a market data source but reflect forced-sale conditions if the exposure period was short; adjust for the premise of value.

Leasehold improvements are valued with the realty unless the lease makes them removable; check the lease terms before allocating.

Diamond price per carat rises with size in the same color/clarity grade; total value = price per carat × carat weight, not a linear extrapolation from a smaller stone.

Fluorescence, culet, girdle thickness, and polish/symmetry affect diamond value and appear on a laboratory report; note them in the description.

Treated stones and synthetics must be identified and disclosed; a value conclusion that assumes natural, untreated origin is invalid if treatment is present.

Gold melt value = weight in grams × (fineness) × (spot price per gram); add or subtract for fabrication, design, and brand in the retail context.

Antique and signed jewelry may exceed melt and stone value due to provenance and maker; document maker's marks and period characteristics.

Effective gross income = potential gross income − vacancy and collection loss + other income.

Net operating income = effective gross income − operating expenses (fixed, variable, reserves); exclude debt service and income tax.

Operating expense ratio = operating expenses ÷ effective gross income; compare to comparables to test the cap rate's consistency.

Cash-on-cash return = before-tax cash flow ÷ equity invested; used for leverage analysis, not for direct capitalization of the property.

Adjustment grid direction: if the comparable sold with a feature the subject lacks, the comparable is superior - subtract from its price.

Land value by extraction: land value = sale price − depreciated cost of improvements; allocation uses a typical land-to-building ratio.

Review independence: the reviewer must not have prepared or supervised the original report, and must disclose any prior involvement.

Error taxonomy for QC: factual error, methodology error, standards violation, and reporting deficiency; classify before scoring.

A review that concludes a different value must include its own analysis and support, not only criticism of the original report.

Turnaround metric: measure from engagement acceptance to delivery; track revision cycles per report as a quality indicator.

Conflicts of interest check: verify no fee, ownership, or family relationship between the appraiser and the subject or parties to the transaction.

Discount rate selection: build up from risk-free rate plus equity risk premium plus size and company-specific premiums when no beta is reliable.

Company-specific risk premium must be supported by identified factors (customer concentration, key-person dependence, thin management) and not used to hit a target value.

Minority interest valuation: apply lack-of-control discount only if the interest lacks control rights; the guideline public company method already produces a minority value.

Date consistency: benefit stream, discount rate, and balance sheet data must all be as of the valuation date; forward-looking data must be labeled as such.

In-place vs removed value: installation adds value only when the asset will remain in place and is functional there; otherwise installation is a cost to remove.

Obsolescence must be measured from market evidence; a purely age-based deduction cannot capture functional or economic obsolescence.

Highest and best use of a machine may be continued use, sale to a secondary user, or scrap - evaluate all three before selecting a premise.

When comparables are scarce, document the search, the adjustment rationale, and the reliance on cost approach as a cross-check.

Intended use drives premise: insurance schedules use replacement cost new; estate and donation use fair market value; lending uses liquidation.

Value in use versus value in exchange: an installed, integrated asset may be worth more in place than on the open market; state which is reported.

Documentation: record make, model, serial number, condition, and location; without identification, the value conclusion cannot be replicated.

Sampling in large inventories must be random or stratified and statistically defensible; disclose the sampling method and confidence.

Value is defined by the market level chosen: retail replacement, wholesale, or liquidation; the same stone has different values at each level.

Laboratory reports (e.g., grading of color and clarity) are inputs, not appraisals; the appraiser must still determine value independently.

Metals: platinum 950 = 950/1000 fine; test with acid, electronic tester, or XRF, and disclose the method used.

Photograph and describe each item with measurements; a photograph alone is not sufficient identification for high-value pieces.

Cap rate versus discount rate: cap rate reflects one year's income and growth; discount rate reflects total required return including growth.

Market rent versus contract rent: use market rent for leased fee analysis unless the lease is the property interest being valued.

Lease analysis: the leased fee interest includes the landlord's rights under existing leases; the fee simple interest assumes market rent.

Reconciliation must explain why the selected approach is most reliable given the data, not simply weight the approaches equally.

Scope adequacy test: was the data sufficient for the conclusions given the intended use? A well-formatted report can still fail on scope.

Review report structure: identify the assignment, summarize the original report, analyze compliance and methodology, state findings, and conclude on credibility.

Management records: engagement letter, fee schedule, appraiser qualifications, and conflict disclosures form the audit trail for each assignment.

Peer review sampling should cover high-value, high-risk, and complaint-driven assignments disproportionately.