Valuation Report

REPLACEMENT
METHOD
Presentation by
Liberace C. Cabrera Jr.
Table Of Content
1
Definition
2
Issues with Replacement Value
3
Comparison to other values
4
Use of the Replacement method
6
Formula and sample problems
Definition
"As the cost of similar assets that have the nearest
equivalent value as of the valuation date."
-The National Assoication of Valuators and Analyst
The replacement cost method involves arriving at an asset’s

value by reference to the present-day cost, in an arms-
length transaction, of replacing that asset with a similar
asset in a similar condition. The method is based on the
principle that a buyer will not pay more for an asset—and a
seller will not accept less—than the price of a similar asset.
The method can be used to value both an entire business
and its individual assets.
1
Under the replacement value method, the value of the individual
assets shall be adjusted to reflect the relative value or cost equivalent
to replace that asset. The following are the factors that can affect the
replacement value of an asset:
Age of the asset

It is important to know how old assets is. This will enable the valuator to determine the cost related in
order to upkeep a similarly aged asset and whether assets with similarly engineering design are still
available in the market
Size of the assets

This is important for fixed assets particularly real property where assets of the similar size will be
compared. Some analysts find that the assets can produce the same volume for the asset of the
same size
Competitive advantage of the asset

Assets which have distinct characteristics are hard to replace but the characteristics
and capabilities of the distinct asset might be found in similar, separate assets.
1.1
Issues with Replacement Value
Start-ups Intangible Assets Internal Valuations

The replacement value is,
The replacement value Does a poor job of valuing
however, useful for
method is not very useful the intangible assets of
certain internal
in valuing a startup that the firm, as many of these
valuations. Entrepreneurs
has value as a going assets are not capable of
or managers may be
concern replacemen
concerned with the
replacement cost of key
operational assets.
2
Comparison to
Other Values
lower than the actual amounts invested, as the price of acquiring an asset of a similar
condition typically decreases over time;
higher than liquidation value, as replacement value does not include a distress
discount; and
higher than book value, as for accounting purposes assets tend to be depreciated
more quickly than they age
3
Use of the replacement cost
method
1
Drawbacks
2 Not a primary valuation method when valuing a business
3 Use in the context of "start-ups" and liquidated businesses
4 Use as a method of valuing individual assets
5 Use as a "floor"or "ceiling" on a valuation

FORMULA AND SAMPLE PROBLEMS
Net Book Value replacement adjustments

Replacement Value per share=
Outstanding Share
FORMULA AND SAMPLE PROBLEM
Cute Co. in the year 2022 presented their statement of financial position with the
following balances: Current Assets is Php 300 Million, Non-current Asset is 900
Million; Current Liabilities is Php 150 Million; Non-current Liabilities is Php 650
Million and the Outstanding Share is 1 Million.
CURRENT ASSETS Php 300,000,000
NON-CURRENT ASSETS 900,000,000
TOTAL ASSETS Php 1,200,000,000
CURRENT LIABILITIES Php 150,000,000
NON-CURRENT LIABILITIES 650,000,000
TOTAL LIABILITIES Php 800,000,000
Through the given information for Cute Co., suppose that 50% of the non-current
assets has an estimated replacement value of 150% of its recorded net book
value while the remaining half has estimated replacement value of 75% of their
recorded net book value.
With the given information, the equity value is adjusted to:
1. Calculate the replacement value of the affected items. Total Adjusted Non-current
Assets
50% of Non-current Assets-150% of the net book value
Non-current Assets Php 900,000,000 Adj (1) 675,000,000
50% Adj (2) 337,500,000
% of affected item
50% of the Non-current Assets Php 450,000,000 Total Adj. NCA 1,012,500,000

Premium on Replacement 150%
Adjusted Non-Current Assets (1) Php 675,000,000
50% of Non-current Assets-75% of the net book value
Non-current Assets Php 900,000,000

% of affected item 50%
50% of the Non-current Assets Php 450,000,000
Discount on Replacement 75%
Adjusted Non-Current Assets (2) Php 337,500,000
With the given information, the equity value is adjusted to:
2. Add back the unadjusted components

Total Adjusted Non-Current Assets Php 1,012,500,000
Add: Current Assets 300,000,000
Total Assets- Replacement Value Php 1,312,500,000
3. Apply the Replacement Value Formula

Php 1,312,500,000-800,000,000
Replacement Value=
1,000,000 Shares
512,500,000
Replacement Value=
1,000,000 Shares
Replacement Value= Php 512.50 per share

References:
https://thebusinessprofessor.com/en_US/business-personal-finance-
valuation/replacement-value?fbclid=IwAR1p_dut5HMVwhcTnJsHG46AI4ZnH-
GZss55ZJo3kcI2oTFYawMbgopLFrI
https://jusmundi.com/en/document/wiki/en-replacement-cost-method?
fbclid=IwAR1rf4LCDIgAawMqocaeWA6ZUEVZigemSf_5CNaZ2X5VmdD6oo90Z-
UggDs
Valuation Concepts and Methodologies by Marvin V. Loscano (2021)

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REPLACEMENT

The replacement cost method involves arriving at an asset’s

Age of the asset

Size of the assets

Competitive advantage of the asset

Start-ups Intangible Assets Internal Valuations

2 Not a primary valuation method when valuing a business

3 Use in the context of "start-ups" and liquidated businesses

4 Use as a method of valuing individual assets

5 Use as a "floor"or "ceiling" on a valuation

Net Book Value replacement adjustments

With the given information, the equity value is adjusted to:

Premium on Replacement 150%

Adjusted Non-Current Assets (1) Php 675,000,000

50% of Non-current Assets-75% of the net book value

Non-current Assets Php 900,000,000

With the given information, the equity value is adjusted to:

2. Add back the unadjusted components

3. Apply the Replacement Value Formula

Replacement Value= Php 512.50 per share

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