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Depreciated Replacement Cost Valuation Approach - Essay Example

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Depreciated Replacement Cost Valuation Approach

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). ...
Although in this case we are in fact talking about a specialized production plant, there is a difference, as 'specialized property' is defined as "Real property that is rarely, if ever, sold in the market, except by way of a sale of the business or entity of which it is part, due to the uniqueness arising from its specialized nature and design, its configuration, size, location, or otherwise". (Valuation Standards Board, 2007). Although this definition is rather broad, it is still basic in that it can generally be applied to all situations in this regards, and in our particular case, we can see that the depreciated replacement cost valuation approach would be very positive here.
The actual results will depend greatly on the success of the specialized production plant, as the actual value of a specialized property will vary, depending on its use, and for example, "If there is no demand in the market for the use for which the property is designed than the specialized features will either be of no value of have a detrimental effect on value as they represent an encumbrance". (Valuation Standards Board, 2007). Therefore one of the most important issues here is that of the definition of use, and only after you have defined the value in use of the particular specialized production plant would you be able to properly assess the value that would be gained from going with a depreciated replacement cost valuation approach. It is important to remember here that when you are appraising a business, it is not uncommon to use real estate appraisers to value the actual and real property segment of both the business and the machinery appraisers to value the personal ...Show more


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…
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Depreciated Replacement Cost Valuation Approach essay example
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