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Depreciated Replacement Cost Valuation Approach
Pages 4 (1004 words)
Depreciated replacement cost valuation approach is an approach which is "a cost-based method of arriving at a value for assets which are normally never exposed to the open market" (Plimmer & Sayce, n.d.). There are many different reasons as to how and why a depreciated cost valuation approach could be used by a client to value the freehold interest of a specialized production plant, and in order to be able to properly acknowledge and understand these reasons, we must not only use proper and efficient examples to prove this case, but as well, we must discuss all of the key and related issues that are interrelated to this issue overall.
The comparison therefore has to be made with a hypothetical substitute" (Valuation Standards Board, 2007). This approach is one which basically estimates the overall replacement value of a company or business, and it works by analyzing the cost of its components (for instance, this would include such things as surrounding land and building itself), and the value is then calculated by adding the free value of the market itself to of the land as if vacant, to that of the reconstruction cost of the building, and then you have to subtract the depreciation that has been suffered by the company or business over the years, in comparison to that of a newer building. A depreciated replacement cost valuation approach could absolutely be used by a client in order for them to be able to freehold interest of a specialized production plant, for instance, as this approach is one which is to be used basically only where there is no active market for the asset that is being valued (such as a specialized production plant). ...
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