Join Jim Stice for an in-depth discussion in this video Cost approach, part of Finance Foundations: Business Valuation.
- The three primary asset valuation techniques are…the market approach, the income approach,…and the cost approach.…The cost approach is based…on the replacement cost of the asset.…Now often, the replacement cost is estimated…based on what it would cost to replace the asset new,…and then an adjustment is made for wear and tear…to reflect the fact that the asset is used.…The cost approach involves a subtle shift…from the underlying concept of fair value,…because the cost approach is based…on an entry price, the cost to buy,…instead of an exit price,…the price at which the asset can be sold.…
The cost approach might be used…with commercial real estate…if there are no other similar properties…that have recently changed hands.…For example, assume that the real estate…involves the land, a building,…and a surrounding parking lot.…The cost approach would involve…estimating how much it would cost…to buy similar land and then the cost…of constructing the building and the parking lot.…Well let's illustrate this with a numerical example.…
Make sure to check out the Stice brothers' other accounting and finance courses to understand the other economic factors that impact your business.
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- Valuing companies by multiples
- Using price-to-sales ratios to value companies
- Using discounted cash-flow analysis to estimate value
- Valuing McDonald's as a case study