must comply with current regulations on cost accounting and on technical and economic standards, consumption norms of raw materials, fuel, labor, and must pay attention to the current market price level for unit prices of materials. Based on the average profit of the same type of MMTB manufacturing industry to estimate the manufacturer's profit. When estimating taxes and fees, it is also necessary to comply with State regulations at the time of valuation. In addition, it is necessary to fully estimate the costs of wages, social insurance, management costs, fees, taxes, manufacturer's profits, ... transportation costs, installation, warranty, operation when putting MMTB into use, ... to achieve cost estimates at the most reasonable level.
For domestically produced equipment, there must be specific calculation bases such as: Estimated design of equipment; manufacturer; types of materials and equipment according to codes; specific technical characteristics of equipment; manufacturing conditions such as working hours, worker level, etc.; amount of electricity consumed;...
For domestically produced MMTB that must be imported, it is necessary to base on import documents, base on the selling price of the selling companies, check and compare with remittance notice, customs declaration or import license to verify the import price of MMTB in foreign currency. On that basis, convert to domestic currency at the time of payment. In addition, it is also necessary to base on import costs and related manufacturing contracts to fully estimate the costs of regeneration or replacement of MMTB that need to be valued.
Step 3: Estimate the cumulative depreciation of the MMTB
In this step, the appraiser needs to estimate the total cumulative depreciation of the MMTB based on all causes. In other words, the appraiser must take into account both the natural depreciation (physical depreciation) and the depreciation due to obsolescence of the asset (invisible depreciation).
Accumulated depreciation is the total amount of depreciation on the MMTB for any reason. This creates the difference between the replacement cost (remanufacturing) and the market value of identical or similar MMTB at the time of valuation.
When estimating cumulative depreciation, two types of depreciation need to be identified:
* Estimating natural discount: Can be done in 2 ways:
Automatic discount factor tangible depreciation coefficient of MMTB | = | Effective life | x | 100% | (3.3) |
Economic life |
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+ Method 1: Based on the effective life and economic life of the equipment to determine and estimate the natural depreciation coefficient or tangible depreciation coefficient, from which to calculate the corresponding depreciation level of the asset:
(Economic life: is the estimated maximum time of use that brings economic efficiency; effective life: is the actual time of use that has brought economic efficiency)
+ Method 2: Based on the damage or wear of the main parts of the equipment. Based on the investigation and observation to classify the damage phenomenon according to each type of cause to calculate the visible wear coefficient according to the following formula:
n
H i T i
n
H i 1(3.4)
T i
i 1
In there:
+ H: Tangible depreciation coefficient of fixed assets (calculated as a percentage).
+ H i : Wear coefficient of main technical part i.
+ T i : Value proportion of component i in total value of MMTB.
+ n: Number of main technical parts in the MMTB.
Example 3.3: Determine the tangible depreciation coefficient of a concrete mixer with the following machine parameters: Mixing capacity 15m3/h, economic life is 18 years, actual time from putting into use to valuation time is 12 years.
Based on formula (3.3), the visible wear coefficient of concrete mixer is:
H = 12/18*100% = 66.67%
Example 3.4: Determine the tangible depreciation rate of a HYNDAI brand truck with the following parameters:
Main technical department
Wear and tear of main technical parts (H i ) | Value share of technical component i (T i ) | Depreciation value (H i .T i ) | |
1. Engine | 30% | 55% | 16.5% |
2. Chassis | 20% | 15% | 3.0% |
3. Electrical system | 15% | 20% | 3.0% |
4. Other systems | 10% | 10% | 1.0% |
Total | 100% | 23.5% |
The visible wear rate of HYNDAI trucks is:
(30% x 55%) + (20% x 15%) + (15% x 20%) + (10% x 10%) = 16.5%
* Estimated discount due to obsolescence
The depreciation due to obsolescence of MMTB or invisible wear and tear of MMTB is often done by the market-based method. Accordingly, people base on the actual selling price of MMTB on the market associated with the technical and economic characteristics of MMTB or refer to past transactions to estimate an appropriate % of depreciation.
Estimated value of MMTB | = | Cost of reproduction or replacement cost | - | Discount cumulative |
Step 4: Estimate the value of the MMTB to be valued. The value of the MMTB is determined by the formula:
In the process of estimating the value of MMTB, the remaining value of MMTB is based on the cost of reproduction or replacement of MMTB and the accumulated depreciation to calculate the remaining value of MMTB. However, in the case of parts and assemblies that are severely damaged (from 40 - 45%), it may be unsafe to continue using them. At this time, it is necessary to consider the possibility of replacing those parts and assemblies. Based on determining the market value of these parts and assemblies, the valuer will estimate the market value of the used MMTB to be equal to the remaining value of the MMTB minus the value of the parts and assemblies that must be replaced. At that time, the estimated value of MMTB is calculated according to the formula:
Estimate of MMTB in use
Market value= | Residual value | - | The value of details and the part must be replaced. |
Example 3.5: A business needs to evaluate a used truck of the Japanese Toyota brand, manufactured in 2010, with a payload of 5 tons, original price of 850 million VND, used for 6 years, and total kilometers traveled is 800,000 km.
According to the manufacturer's specifications, the economic life of a Toyota truck (until it needs to be overhauled) is 1,600,000 km.
Based on the above data, we can calculate:
- The remaining usage rate of the car is: 800,000/1,600,000 = 0.5
- The remaining value of the car is: 850 million x 0.5 = 425 million VND.
During use, suppose that some spare parts and details have been replaced to ensure the vehicle operates safely, including: 3 tires worth 25 million VND; gearbox worth 10 million VND; brake pads worth 0.5 million VND; battery worth 1 million VND; other details worth 1.5 million VND. The total value of replacing the details and spare parts is:
25 + 10 + 0.5 + 1 + 1.5 = 38 million VND
=> The estimated market value of the used car is: 425 - 38 = 387 million VND.
c. Advantages and disadvantages
* Advantage
- This method is quite suitable when there is no suitable market evidence for comparison. In other words, this method can create a basis for comparison in the absence of market prices of MMTB. In some situations, this method is the last resort when other methods cannot be used.
- This method is quite suitable when valuing MMTB for separate transactions and purposes. The calculation results by this method depend largely on the expertise and experience of the valuer. Therefore, if the valuer has enough expertise and experience, it will limit errors when the correlation between supply and demand of MMTB shows signs of excessive imbalance.
* Limit
- Valuation by this method must be based on market data for comparison, so the limitations of the comparison method are also the limitations of the cost method.
- In principle, total cost does not equal value and does not necessarily create value. Therefore, using the approach of accumulating the costs of many components of a machine may not equal the real value of the entire machine or the market value of the machine.
- Estimating cumulative depreciation can be very subjective and difficult, as there is no single widely accepted method for accurately estimating depreciation of MMTB.
- This method requires the appraiser to have a lot of experience and technical proficiency in MMTB. Therefore, this method is often not widely used in important cases.
3.3.3. Income method
a. Basis of the method
The income approach (also known as the investment approach) is a method of estimating the value of an asset based on the income stream that the asset is likely to generate in the future in the form of capitalizing the estimated future income to its present value.
The income approach is based primarily on the principle of foreseeability of future benefits and the principle of highest and best use. According to these principles, it is assumed that the asset is exploited and used in the highest and best possible manner and the current market price of an asset will be equal to the present value of all future income that can be received from that asset.
b. Method content
In the income method, people determine the capitalization value of the income that MMTB can bring in the future according to the following general formula:
0
n CF
In there:
V ti 1 (1 r ) t
(3.5)
- V 0 : Present value of income or estimated value of MMTB
- CF t : Income received in year t.
- r : Presentization rate or discount rate.
- n : Number of years receiving income.
To determine the value of MMTB according to the income method, people often perform the following work contents and order:
Step 1: Estimate the annual income generated by the MMTB.
In this step, the appraiser needs to estimate the income that the MMTB can bring each year in the future based on appropriate methods, which can estimate the individual income of each year or estimate the average annual income of the MMTB. The estimated income can be in different forms such as: Potential Gross Income (PGI), Actual Gross Income (EGI), Net Operating Income (NOI), Equity Income (EI), Borrowed Income (MI), etc.
Step 2: Estimate all annual costs of the MMTB. When estimating costs, the appraiser needs to fully estimate the costs that may arise during the use and operation of the MMTB, including operating, maintenance, repair costs, service fees, taxes payable, etc. These costs are the basis for
determine the annual net income cash flow of MMTB.
Step 3: Determine the appropriate discount rate or present value rate.
The presentization rate or income discount rate chosen should reflect the similarity between the investor's risk and expected income. Typically, the following main methods are used to determine the presentization rate:
- Method 1: Calculate risk compensation according to the following formula:
incarnate
Current ratio= | Profit margin of risk-free investment | + | Risk premium (risk surcharge) |
In there:
+ Rate of return on risk-free investment: Is the rate of return earned from risk-free investments, usually calculated using the interest rate of long-term government bonds at the time closest to the valuation date.
+ Risk compensation level: These are the risk compensation levels for different types of risks that may arise in MMTB investment such as business risk, financial risk and operational risk. When determining the expected risk compensation level, the valuer needs to carefully study the characteristics of each region, each local economic base, the characteristics of MMTB and the ability to exploit and use them.
- Method 2: Calculated by the weighted average method: based on the loan recovery rate and the investor's expected interest rate to determine according to the following formula:
R 0 = M x R m + (1-M) x R e (3.6)
In there:
+ R 0 : Current rate or capitalization rate.
+ M: Proportion of bank loans in total investment capital
MMTB.
+ R m : Loan recovery rate (cost of using loan capital).
+ R e : Investor's expected interest rate.
- Method 3: Using the comparison technique: The current rate applied to the MMTB to be valued is determined by evaluating and comparing it with the current rates of similar MMTB on the market. The current rate of these assets can be determined by taking the annual net income from the asset business and dividing it by the selling price.
Step 4: Use techniques to determine the present value of future cash flows to find the estimated value of the asset to be valued.
In this step, one can use either direct capitalization or discounted cash flow method to find out the present value of the future cash flow of the MMTB.
* Direct capitalization method: This method is often applied in cases where the MMTB brings the same income each year and the number of investment years is unlimited. The estimated value of the MMTB is calculated according to the direct capitalization formula as follows:
V I
(3.7)
0 r
Or V 0 I. GI
In there:
-V 0 : Estimated value of MMTB.
- I: Average annual net income that MMTB brings.
- r: Presentization rate or discount rate.
- GI: Income capitalization ratio (GI = 1/r).
Example 3.6: A business is considering investing in a machine with specific information: Estimated net income that the machine brings in on average each year is 10 billion VND; Expected market rate of return is 10%/year.
Applying formula 3.7 above, the estimated value of the MMTB to be valued is:
Vo = I/r = 10 billion VND/10% = 100 billion VND .
* Discounted cash flow method: Is an estimation method
The value of an asset is determined by discounting all expected future cash flows to the present, taking into account inflation and income volatility. This method is often applied when the investment period in MMTB is limited.
According to this method, the value of MMTB is calculated as follows:
- Uneven cash flow:
n CF V
V 0 tn
(3.8)
t 1 (1 r ) t (1 r ) n
In there:
+ V 0 : Estimated value of MMTB.
+ CF t : Net income of year t.
+ V n : Expected recovery value of MMTB in year n.
+ n: MMTB holding time.
+ r: Discount rate.
- Steady cash flow:
n
1
V 0 CF
V n
(3.9)
t 1 (1 r ) t
In there:
(1 r ) n
+ CF: Net income that MMTB brings annually
+ V 0 ,V n , n, r: Explained above.
When evaluating and selecting investment projects in MMTB according to
income method, we can use the standards NPV, IRR, MIRR, PI, EAT,... (these standards have been introduced in the Corporate Finance course)
Example 3.7: A business is considering investing in a piece of equipment for its production and business activities with the following information:
The equipment mentioned above is a completely new type of equipment, has an economic life of 10 years and can bring in a net income of VND 15 billion/year in the first 4 years, VND 10 billion/year in the next 2 years and VND 7 billion/year in the remaining years. This equipment has an insignificant salvage value. The discount rate chosen is 12%/year throughout the life of the equipment. Estimate the value of the above equipment in the following two cases:
- The expected time of exploitation and use of the equipment is 10 years.
- The expected time of exploitation and use of the equipment is 6 years, then resale at an estimated price of 18 billion VND.
Solution:
- If the business plans to exploit the entire usage time