1.1. Property to be appraised
1.2. Purpose of appraisal
1.3. Intend uses of appraisal
1.4. Premise of value
1.5. Effective date
1.6. Limiting conditions
2.1. List, describe, and classify assets
2.2. Research cost, comparable sales, and income data
Income Approach is defined as a valuation procedure used to estimate fair market value based on present value of anticipated future benefits of ownership as represented by interim cash flow receipts plus consideration of residual receipts. In other words, value of a business enterprise is determined by discounting future net cash flows available for distribution or reinvestment to their present worth at market-derived rates of return.
Sales Comparison Approach
When developing a valuation indication of a business using the market or comparable company approach, the subject company is compared to similar businesses that have recently been sold or are offered for sale on the open market.
The sum-of-the-assets approach is also called the "net asset value approach". This approach involves adjusting the subject company's latest available balance sheet to reflect current fair market values of assets and liabilities at the valuation date. The fair market value of a business enterprise is then equal to the sum of the fair market value of the subject company's assets less the total of the fair market values of its current liabilities.
Sales Comparison Approach
This approach is adopted for properties, which are commonly transacted in the market, and therefore market data and transaction records of them are readily available for comparison. Open Market Value is intended to mean "the best price at which the sale of an interest in a property might reasonably be expected to be completed unconditionally for cash consideration on the date of valuation" under certain assumptions.
This approach is suitable for valuing income-generating properties by which property value is arrived at by capitalizing the anticipated benefits from the property at market-derived rates of return. The method is also adopted for valuing properties subject to existing tenancies or properties commanding monopoly advantages where comparable of similar properties may not be available. For properties involving varying and complicated future cash flow, the Discounted Cash Flow (DCF) Analysis can be used. It involves the projection of cash inflow and outflow, and capitalization of the resulting net cash flow at market-derived rates of return.
This approach is suitable for valuing those properties having no identifiable market by which property value is based on the estimation of current cost to reproduce or replace the existing structures, and deducting accumulated depreciation on the property. The method is mostly adopted in valuing specialized structures, and non-income producing structures.
For those properties where the above-mentioned approaches are inappropriate to assess their values, other approaches such as residual method and profit method can be applied.
Residual method, which is mostly applied for site valuation, is based on the hypothesis that the site value represents the residual value of the completed developer's profit to be incurred for such property development.
Profit method can be applied to business property having certain exclusive features, which are material to its business or otherwise can enhance its volume of business. In using this method, the operating profit generated from the property would be investigated with reference to accounting statements of the business and market information of the same trade. After deducting all the operating costs of the business, profit tax and a reasonable sum for operator's remuneration, the residual amount will represent the cost willing to be paid by the operator for occupying the property. Market value of the property will then be arrived by capitalizing the aforesaid amount with market-derived rates of return.
The Cost Approach
The cost approach establishes value based on the cost of reproducing or replacing the asset, less depreciation from physical deterioration, and functional and economic/external obsolescence.
Cost of Reproduction New is defined as the estimated amount required to reproduce the asset at one time in like kind and materials in accordance with current market prices for materials, labor, and manufactured equipment, contractors' overhead and profit, and fees, but without provision for overtime, bonuses for labor, or premiums for materials or equipment.
Cost of Replacement New is defined as the estimated amount required to replace the entire asset at one time with a modern new unit using the most current technology and construction materials that will duplicate the production capacity and utility of an existing unit at current market prices for materials, labor, and manufactured equipment, contractors' overhead and profit, and fees, but without provision for overtime, bonuses for labor, or premiums for material or equipment.
Physical Deterioration is the loss in value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is the loss in value caused by conditions within the Equipment such as changes in design, materials, or process that result in inadequacy, overcapacity, lack of utility, or excess operating costs.
Economic/External Obsolescence is an incurable loss in value caused by unfavorable conditions external to the asset such as the local economy, economics of the industry, availability of financing, encroachment of objectionable enterprises, loss of material and labor sources, lack of efficient transportation, shifting of business centers, passage of new legislation, and changes in ordinances.
The cost approach generally provides a meaningful indication of the value of land improvements, special buildings, special structures, and special machinery and equipment associated with a viable business or justified by economic demand.
When market transactions of comparable assets are not available, when data cannot be extrapolated from larger transactions, or when transactions are non-existent, under premise of continued use, assuming adequate earnings the cost approach is the preferred valuation procedure.
The Sales Comparison Approach
In the sales comparison approach, the value of the appraised asset is estimated through analysis of recent sales of comparable items of the asset. It is employed in the valuation of the asset for which there is a known used market. Under the premise of continued use assuming adequate earnings, consideration is given to the cost to acquire similar items in the used-equipment market; an allowance is then made to reflect the costs for freight and installation.
A variant of the direct sales comparison approach is the use of market relationship. Recent market prices for asset in a property classification are determined with respect to age and are compared with a benchmark price, such as the cost of reproduction new. The ratio is applied to similar property in the classification when the secondary market for the subject asset is too sparse to exhibit appropriate comparables.
The Income Capitalization Approach
In the income capitalization approach, value is developed on the basis of capitalization of the net earnings that would be generated if a specific stream of income can be attributed to an asset or a group of assets. This approach is most applicable to investment and general-use properties where there is an established and identifiable rental market.
In any appraisal study, all three approaches to value must be considered, as one or more may be applicable to the subject Equipment. In some situations, elements of two or three approaches may be combined to reach a value conclusion.