From the course: Finance Foundations: Business Valuation
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Cost approach to business valuation
From the course: Finance Foundations: Business Valuation
Cost approach to 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…
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