Let us now consider some types of costs in use, which, unlike the costs discussed above, do not belong to market-type costs. IVS 2 describes measurement bases other than market value, however to non-market values Not all of them are included, but only those of them, for the calculation of which internal (non-market) information and ideas about the value of the object of assessment of a particular market entity, and not the market as a whole, are largely used.
The most important representative of value in use is investment value.
Investment cost– this is the value of the property being valued for a specific investor or group of investors for given investment goals.
Investment value is determined based on individual investment requirements, therefore its calculation is based on required by this investor income and the specific rate of their capitalization.
Unlike market value, which assumes that there is a “typical” buyer and a “typical” seller, investment value is based on the needs and characteristics of an investor whose motives are atypical of the market. This subjective concept, the calculation of which reflects the fact that this value is formed due to own preferences, individual investment requirements and personal investor motivations that are different from those of a typical buyer or seller taken into account in determining market value, which relates investment value to costs non-market type.
Investment value is associated with determining the present value of future income streams expected from the operation of property, the nature of which is specified investment plans. For the investor important factors risk, amount and cost of financing, future appreciation or depreciation of property and tax considerations.
Sometimes in the literature, in the lists of valuation purposes using investment value, there are those that are not at all related to the concept of investment value or clearly do not correspond to it. For example, such a valuation function as “concluding a transaction with the object of valuation in the presence of a single counterparty” speaks only of a limited market, and not of the special capabilities and goals of the investor associated with the concept of investment value.
Investment value, like all values in use, is calculated by applying Income approach and, putting the individuality of the assessment parameters at the forefront, does not imply the use of a Comparative (Market) approach.
There are a number of reasons why investment value may differ from market. The main reasons may be differences that are reflected in the application of the Income Approach in the amount of cash flow and the discount rate. They consist of:
- in assessing future profitability (required individual norm return on capital);
- individual ideas about the degree of risk (not the market average);
- presence of an atypical tax situation ( tax benefits, special tax status);
- the presence of a preferential lending system that is not alienated from this particular owner (i.e., which does not pass to the new owner);
- the possibility of compatibility of property, in its specific use, with other objects that also belong or are controlled by the owner (synergistic effect, which can reduce risks due to certain effects).
The investment value for a particular investor may differ from its market cost also as a result of different assessments of prestige, location prospects, etc.
Effective use of a range of individual owner tools and capabilities can reduce investment risks and, accordingly, the discount rate. Thus, the investment cost of the object may be numerically higher market cost due to its wider capabilities, which differ from the capabilities of the average market buyer.
This value may also be higher than the market value due to the specific interest of the investor. But it could be less market cost due to the special interest of the seller (sell cheaper, but to the right person) or in the case of using an object other than the NEI, but strictly defined by investment plans.
Investment cost should not be confused with market the value of the investment property, i.e. property in which investments are made, which are at the stage of investment impact.
Use value– another representative of value in use, when the value of property as part of the assets of the enterprise is determined when assessing the value of the enterprise as an operating one (i.e. in general, for the current owner and when current use, which may not correspond to its NEI). Typically, such an assessment is carried out for the purposes of financial statements or the formation of internal management plans. Often, the valued object (real estate or equipment) can only be used for one specific (production) function, and its use value is assessed allocation method(allocations) from the value of the entire business.
- Synergistic affect(from the word synergy(Greek συνεργία, from Greek. syn- together, ergos– active, action)) leads to the fact that the sum of the costs of several parts is less than the cost of the new whole. Cost of synergistic effect determined by capitalizing savings arising for various reasons when various types mergers (horizontal, vertical, conglomerate, etc.).
- See subparagraph 5.5.5.
Traditional methods can be used to calculate investment value, but they do not use market data. For example, an investor may apply a rate of return that is not market and specific to that investor.
When using the discounted method cash flows To determine the value, the appraiser comes to the calculated value of the investment value, and not the market value. Thus, the investment value may be higher or lower than the market value depending on the investor's requirements.
Net present value(net present value, net present value, English Net present value, adopted in international practice for analysis investment projects abbreviation - NPV or NPV) is the sum of discounted values of the flow of payments, reduced to today.
The NPV indicator represents the difference between all cash inflows and outflows brought to the current point in time (the moment of evaluation of the investment project). It shows the value Money The amount that an investor expects to receive from a project after cash inflows have repaid its initial investment costs and the periodic cash outflows associated with the project. Because the cash payments are assessed taking into account their time value and risks, NPV can be interpreted as the value added by the project. It can also be interpreted as the investor's total return. Net reduced NPV value calculated by the formula:
where is the discount rate
where -- payment after years () and initial investment IC (Invested Capital) at the rate of
In a generalized version, investments should also be discounted, since in real projects they are not carried out simultaneously (in the zero period), but are extended over several periods. Calculation of NPV is a standard method for assessing the effectiveness of an investment project and shows an assessment of the effect of an investment given to the present moment in time, taking into account the different time value of money. If the NPV is greater than 0, then the investment is economically efficient, and if the NPV is less than 0, then the investment is economically unprofitable (that is, an alternative project, the profitability of which is accepted as the discount rate, requires less investment to obtain a similar income stream).
Using the NPV, you can also evaluate the comparative effectiveness of alternative investments (with the same initial investments, the project with the highest NPV is more profitable). But still for comparative analysis more applicable are relative indicators. In relation to the analysis of investment projects, such an indicator is the internal rate of return.
Unlike the discounted value indicator when calculating net discounted income the initial investment is taken into account. Therefore, the net present value formula differs from the present value formula by the amount of the initial investment.
In investing, as in any professional activity, its own terminology has been developed. I suggest you understand the concepts that are important for profitable investments.The purpose of investing is to multiply the invested funds. The profitability of a project can be determined based on the investment cost of the property. Let's consider in detail how this can be done.
What is market value
Situations often arise when an inexperienced businessman relies on the market value of an object or even asks a professional to calculate it. In the best case scenario, inaccuracies in the formulation will be revealed in further discussion. But it happens that an investor, purchasing real estate at the specified price, suffers losses.
How does investment value differ from market value? The market rate is the one at which the sale and purchase of an apartment by the parties to the transaction is more likely. And investment value is the personal perception of a property by a specific investor. Let me explain: each entrepreneur invests a certain amount of money, can afford certain risks and plans to achieve a certain income. All these parameters will be different for individual investors. Therefore, the investment value of the same object may differ significantly for different investors.
Investment significance depends entirely on the interests of the investor and may be greater or less than the market value. Essentially it is the future value of the asset. In other words, the cost is also influenced by factors accompanying the transaction: possible risks, payback period, expected expenses (including renovation work and taxes). In order to profitably invest money in real estate, it is important to determine the market value of the premises or plot and compare it with the expected income.
How to Determine Investment Value
It is very difficult to determine the investment rate of real estate on your own. For such calculations, professionals use three methods:
- Expensive. Its essence is that the cost of purchasing the premises should not exceed the cost of purchasing land plot and construction of a similar facility.
- Profitable. Depends on the size of the expected profit. The higher the planned income, the higher the cost may be.
- Comparative. Based on the principle of substitution, i.e. it is necessary to analyze the market value of similar objects.
Specialist investors suggest comparing the obtained figures according to the following scheme:
- expensive - 40%,
- profitable - 30%,
- comparative - 30%.
Using an example, it will look like this: an apartment in St. Petersburg will cost 5 million according to the cost method, 6.2 million according to the income method, and 5.4 million according to the comparative method. We use the formula:
5*0.4 + 6.2*0.3 + 5.4*0.3 = 5.48 million rubles.
It turns out that it makes sense to purchase an object for five and a half million rubles or less.
What is investment attractiveness
The investment value and attractiveness of an asset are closely related. To achieve goals, an investor needs to consider both concepts. They complement each other.
So, before making a decision, you should determine the return on investment period, assess possible threats and calculate the actual profit. It is imperative to take into account the state of the economy of the real estate market, industry trends, the stability of the political situation, as well as personal experience investor to work with similar projects.
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In investing, as in other areas of the financial sector, there is a certain terminology. In order to understand the concept of investment value, you need to understand what investments are in general.
The phenomenon of investing money in something in order to generate income as such appeared in the economy of our country relatively recently. Under the planned type of economy that existed under the Soviet Union, there was no investment as such. Private property was not welcomed, and the state allocated subsidies to nationalized enterprises.
Therefore, investing as a type financial activities appeared in our country with the restructuring of the economy according to the Western capitalist model. In such an economy, investing your savings in some object in order to make a profit is a good way to earn money.
What is investment value? This term should be distinguished from the market price, since these are completely different concepts.
The market value of an object is the price for which it can be sold, exchanged, or bought. That is, this is his actual assessment. Investment value is something else entirely. This term reflects future income for each specific investor. In this case, future benefits are brought to the present time.
The fact that the investment price is different for different investors is quite reasonable and easy to explain. Each specific investor invests a certain amount of money in an object. Each of them has a different amount of deposits. Also for each individual financial entity the level of risks will be different. Accordingly, the profit from the investment object will also be different.
This type of value may be contrary to the market value. This happens for the following reason: the expected income from the object may be higher or lower than the market price of the enterprise. This is a subjective measure of asset valuation. It reflects the investor’s intentions, which are not related to purchase and sale or any commercial activities relative to the object.
Grade
If we evaluate the investment price of an enterprise, then this factor can give a voluminous and sufficient useful information about development and prospects of this production. It can show how attractive the investment is and can also help you develop a financing plan.
To estimate the cost, factors such as:
- Tax status, and accordingly, the amount of taxes paid by the enterprise;
- Degree of forecast development;
- Quantity and total amount material costs;
- Estimation of the value of future material income and flows;
- Rate of return;
- Determining the number and degree of risks specific to a given deposit project.
If, as a result of the assessment, it turns out that the investment price is much higher than the market price, this means that the enterprise is extremely attractive to future investors.
If the opposite situation is observed, then the attractiveness for investors is low. This means that it will be more difficult to find people who would invest money.
The main task for a specialist involved in attracting investors to the development of an enterprise is to increase investment value by all available means. This will attract a large number of deposits, which will allow the enterprise to develop even more intensively. This task is carried out by studying the deposit policy and ensures the competitiveness of production or a company.
This factor is very important when assessing the rationality of investments. It is he who will show the future investor whether it is necessary to invest money in this project or is it just another “dummy”.
Investment value is a specific concept. This indicator is calculated through an individual approach to each potential investor, depending on the objectives practical application investment object. It is impossible to calculate it once and then publish an ad. Ultimately, the amount of investment will be determined depending on the investor's goal.
What is investment value
Investment value can be interpreted as the cost of intellectual property for each specific investor. When determining it, the investment conditions and the ultimate goal of the investor are taken into account. It is noteworthy that this indicator may differ radically from the market price of the property. This is due potential income, which can either significantly exceed the market value, or vice versa.
Investment value primarily reflects the investor's goals, which are not related to the subsequent sale of the investment object. To determine this indicator, a number of key factors are taken into account:
- the amount of taxation that is imposed on the enterprise;
- the total value of material expenses;
- identification and determination of risks on deposits;
- calculation of profitability indicator;
- assessment of potential profit and turnover.
Types of cost
In addition to the market and investment value, the price of the object can be:- Liquidation - determined through an auction. This is the real price at which a bankrupt enterprise or property seized by a court decision can be sold. The liquidation value of an object can also be determined in addition to the market value when applying for a loan secured by this object.
- Disposal - determined after the failure of the object, or at the end of its practical use, or in the presence of significant damage, as a result of which the operation of the object for its intended purpose is impossible.
- Restorative - to determine the level of taxation or for correct management accounting.
- Special - a price that is in addition to the market value of the property. It is calculated if the object is physically, legally or economically connected with the property being sold.
Assignment of the company's investment value
The investment value of an enterprise is determined depending on a specific investor or groups of persons, taking into account the certainty of the objectives of strategic investments for the further operation of the object of possible investments. There is a certain level of enterprise value, above which the transaction becomes meaningless for the investor.
The investor is always interested in obtaining higher profits, therefore, in practice, during negotiations between the parties, the investment value does not differ significantly from the market value. To understand this process, one should consider and understand the key reasons for strategic investments in Russia:
- vertical integration of the enterprise, which involves the acquisition of facilities to expand the industrial base;
- developing an oligopoly or monopoly by eliminating competitors by acquiring their commercial properties;
- purchasing promising assets below market value during an economic crisis;
- increasing the capital of the enterprise through the restructuring of internal assets;
- bringing the company's products to adjacent markets, which will allow the implementation of a diversification strategy in relation to potential customers;
- acquisition of new marketing and management technologies;
- identification of potential synergistic effects.
Investment value assessment
Determining the investment value of an enterprise is relevant in the following cases:- if it is planned to sell the appraisal enterprise with one counterparty;
- if the object is considered as an investment;
- when carrying out activities aimed at reorganizing the company;
- for analysis or justification purposes investment potential companies.
- current and potential material costs/income;
- assessment of the future value of the enterprise;
- current tax status;
- level of predictability.
Carrying value of investment objects
Book value - the value that corresponds to the price of the asset in the line balance sheet. Essentially this actual price enterprises without taking into account depreciation and surplus value. What is commonly called the original or original cost, in IFRS is listed as gross book value. Investment objects may be:
- funds;
- stock;
- industrial equipment;
- private enterprises or large companies.
The book value of a company is determined from the books of accounts. Typically, this is the original cost of the property after deducting any money spent on depreciation. This indicator may coincide with market price only at the time of acquisition of the asset. In other cases, the book price may differ significantly from the market value of the enterprise.
Investment value is the price of an asset, which depends on the investor’s goals and investment conditions. It is determined individually in each specific case. The main purpose is to determine the development prospects of the company to identify the degree of attractiveness for investors. Therefore, the IP indicator may differ significantly from the market value of the investee. Investment value assessment is carried out taking into account market conditions, as well as the tasks and goals of the investor.
