Jomie Grace MansayonBSCA-3Methods of ValuationComparison Method of ValuationComparison Method of Valuation is the most commonly used and accepted method in ascertaining the market value of properties. Under the Comparison Method, the valuation approach entails comparing the subject property with similar properties that were sold recently and those that are currently being offered for sale in the vicinity or other comparable localities. The characteristics, merits and demerits of these properties are noted and appropriate adjustments thereof are then made to arrive at the value of the subject property.Investment Method of ValuationThis method of valuation is usually applied for investment properties. In the Investment Method, the annual rental income presently received or expected over a period of time for the lease of the property is estimated and deducted therefrom the expenses or outgoings incidental to the ownership of the property to obtain the net annual rental value. This net annual income is then capitalised by an appropriate capitalisation rate or Years Purchase figure to arrive at the present Capital Value of the property.The relevant capitalisation rate is chosen based on the investment rate of return expected (as derived from comparisons of other similar property investments) for the type of property concerned taking into consideration such factors as risk, capital appreciation, security of income, ease of sale, management of the property, etc.Residual Method of ValuationThe Residual Method of Valuation is normally used for development land or projects. This approach entails estimating the gross development value of the development components and deducting therefrom the development costs to be incurred, i.e. preliminary expenses, statutory payments, earthworks, infrastructure and building construction costs, professional fees, contingencies, project management fees, marketing and legal fees, financing costs, developers profits and other costs (if any) to arrive at the residual value. This residual value appropriately discounted for the period of development and sale is deemed to be the present market value of the subject property.The gross development value is derived by comparing the development components of the subject property with similar properties that have been sold recently and those that are currently being offered for sale in the vicinity or other comparable localities. The characteristics, merits and demerits of these properties are noted and appropriate adjustments thereof are then made to arrive at the proposed selling prices of the development components. The development costs to be incurred are the actual or estimated costs, fees, etc which are likely to be incurred for the completion of the development components.

Cost Method of ValuationIt is normally used for individually designed properties or specialised properties for which comparisons are not available or in appropriate. In this approach, the value of the land is added to the replacement cost of the building and other site improvements.The value of the site is determined by comparison with similar lands that were sold recently and those that are currently being offered for sale in the vicinity with appropriate adjustments made to reflect improvements and other dissimilarities and to arrive at the value of the land as an improved site.The depreciated replacement cost of the building is derived from the estimation of reconstructing a new building of similar structure and design based on current market prices for materials, labour and present construction techniques and deducting therefrom the accrued depreciation due to use and disrepair, age and obsolescence through technological and market changes.Profits Method of ValuationThe Profits Method of Valuation is used to determine the market value of properties with special licensing requirements. It entails the use of the trading accounts derived from the business operation of the subject property. The gross receipts are adjusted to cover payments for purchases and stocks to determine the gross profit. The operating expenses are then deducted therefrom to assess the net trading profit. This figure of net trading profit less the remunerative interest on the tenants capital is the divisible balance. A percentage of the divisible balance is deemed to be the estimated net annual rental value of the subject property. This estimated net annual income is then capitalised by an appropriate capitalisation rate or Years Purchase figure to capitalise the income to the present Capital Value of the property.Discounted Cash Flow Approach(Deemed a more detailed approach to the residual, investment and profits methods)This approach may be engaged to assess the Market Value of ongoing development projects with construction cost incurred and billed progress payments to the purchasers. In the Discounted Cash Flow Approach, the value of the subject property is determined by the streams of present as well as the anticipated amount of cash inflow that will be generated during the respective terms of the whole investment / development period, taking into account the anticipated inflation rate, and adjusting these cash flows to present value by deferring them for the period concerned at an appropriate discount rate. The various development costs, i.e. infrastructure and building construction costs, professional fees / management fees / disbursements, interest on finance, developers profits, contingencies and management costs are also estimated on a cash outflow basis and discounted to the present value. The difference between the two sets of figures is the estimated price which a prudent purchaser would be prepared to pay for the property.http://www.jlj.com.my/index.php?option=com_content&view=article&id=80&Itemid=126

Valuation methodsIn order to evaluate a company, one must have an initial understanding of it. Therefore, at Venture Valuation, we pursue a holistic evaluation approach. All valuations are based on a careful consideration of both hard facts and soft factors. We apply a thorough risk assessment of factors which include: Management Market Science and technology Financials / funding phaseTo determine the value of a company as accurately and as objectively as possible, we use a mixture of different assessment methods. All methods are specifically suited for the evaluation of technology companies, with high growth potential and start-up companies of all types. Although not every kind of valuation method is appropriate, Venture Valuation assesses each company according to their industry and financing phase.Discounted Cash Flow (DCF)Method:The discounted cash flow method takes free cash flows generated in the future by a specific project / company and discounts them to derive a present value (i.e. todays value).The discounting value usually used is the weighted average cost of capital (WACC) and is symbolized as the r in the following formula:

DCF = Calculated DCF valueCF = Cash Flowr = Discount rate (WACC: Weighted average cost of capital)Uses:DCF calculations are used to estimate the value of potential investments. When DCF calculations produce values that are higher than the initial investment, this usually indicates that the investment may be worthwhile and should be considered.

Risk adjusted NPVMethod:The risk adjusted net present value (NPV) method employs the same principle as the DCF method, except that each future cash flow is risk adjusted to the probability of it actually occurring.The probability of the cash flow occurring is also known as the success rate.

Uses:Risk adjusted NPV is a common method of valuing compounds or products in the pharmaceutical and biotech industry, for example. The success rates of a particular compound/drug can be estimated, by comparing the probability that the compound/drug will pass the various development phases (i.e. phases I, II or III) often undertaken in the drug development process.Also known as: rNPV, eNPV (e=estimated/expected)Venture Capital methodMethod:The venture capital method reflects the process of investors, where they are looking for an exit within 3 to 7 years. First an expected exit price for the investment is estimated. From there, one calculates back to the post-money valuation today taking into account the time and the risk the investors takes.The return on investment can be estimated by determining what return an investor could expect from that investment with the specific level of risk attached.Uses:The Venture Capital method is an often used in valuations of pre revenue companies where it is easier to estimate a potential exit value once certain milestones are reached.

Market comparables methodMethod:The market comparables method attempts to estimate a valuation based on the market capitalization of comparable listed companies.Uses:The market comparables method is a simple calculation using different key ratios like earning, sales, R&D investments, to estimate the value of a company.Also known as: MultiplesComparable Transaction methodMethod:The comparable transaction method attempts to value an entire company by comparing a similar sized private company in a similar field, and using different key ratios. The price for a similar company can either come from an M&A transaction or a financing round.Uses:The comparable transaction method is a simple calculation estimating he value of a target company based on comparable investments or M&A deals.Decision Tree analysisMethod:Decision trees are used to forecast future outcomes by assigning a certain probability to a particular decision.The name decision tree analysis comes from the tree like shape the analysis creates where each branch is a particular decision that can be undertaken.Uses:Decision trees are used to give a graphical representation of options, strategies or decisions that can be undertaken to reach a particular goal or decision.More information about valuation methodsFor more information about valuation methods, see the Venture Valuation Resource Center or in the book: Free, P., Assessment and Valuation of high growth companies, Bern: Haupt Verlag, 2006 (also available on Amazon.de).http://www.venturevaluation.com/en/methodology/valuation-methods

Valuation MethodsThere are a number of methods of valuing property, each of which has its advantages and disadvantages. Often, the method changes depending on whether you are building, buying or selling the property in question and despite common misperceptions, valuations of a property can alter significantly depending on the valuation method used.However, before using any methods to value a property, there is a common means of valuation in Ireland which is known as theOpen Market Value. This is not actually a valuation at all but is usually an educated opinion of a propertys value if it were to be sold on the open market on a given date with reasonable time and conditions to do so. As such, the Open Market Value is not a mathematical calculation of a propertys inherent value using a methodological approach, rather an educated opinion based on assumed market conditions.

Whilst there are many methods of valuation, we will only cover the most popular methods here. These can be summarised as follows:Comparable MethodRepayment MethodInvestment MethodResidual MethodCost Method

Thecomparative methodof valuation relies exactly on that - comparison. It involves comparing similar types of houses in a given area to judge the relative value of any particular one. This is the method most often used to achieve the Open Market Value. In order for this to be truly effective in Ireland, it is necessary to know the actual sales prices of the properties, rather than the more commonly published asking prices, however an approximate valuation can still be achieved using the latter.

Another point to make when using the comparative method is that sometimes the prices achieved for a property may not actually represent its actual value. For example a forced or pressurised sale in which a property is sold quickly can often undervalue a given property while similarly, a property owner who requires some of an adjoining field in order to build their dream extension may be prepared to pay a higher price thus overvaluing the property. This should be borne in mind when utilising sales prices as comparisons, as on some occasions, the prices may be higher or lower than what the actual value of a property may be.Another method of valuation is therepayment option, which aims to repay the price of a property within 12-15 years, based on its income. Therefore taking a property which has a rental income of 600 per month, the value of the property would be calculated as 108,000 based on this method.This is arrived at by:

Monthly rent (600) X 12 months = 7,200Yearly rent X 15 years = 108,000

Of course, this analysis can be further modified by taking into account taxes due, vacancy periods, repair costs or rental and capital increases over the time span involved. If an investor were to sell the property at the end of a twenty year investment term, gross profit would be the rent over the last five years plus any capital appreciation which occurred over the entire twenty year term.Aninvestment valuationis calculated using the yield from the property. Using the above example, a property on the market has an asking price of 200,000 and a rental income of 600 per month

The yield of the property is therefore(600 X 12) X 100= 3.6% 200,000

The higher the yield means the greater the return on your investment and using an investment valuation is useful in comparing the returns on a property to other investments such as equity, stocks, bonds or even interest deposit accounts.Another common method of valuation is theresidual value, which in terms of property development, calculates the value somebody may be prepared to pay for a plot of development land for example. The residual value is often useful in calculating whether a profit can be achieved on a development.

At its most basic, the residual value formula can be given as follows:

Value of completed projectlesstotal development costs = value of the property in its present condition.

To gain a more accurate residual value however, it would be necessary to include expected appreciation or depreciation in price of the development once complete less total development costs such as financing and interest costs, taxes and even the developer's profit margin which would allow for the true residual value of a site to be obtained.

Therefore using a crude example, if the estimated sales price for a newly built property is 250,000 and the building costs amount to 150,000, the residual value of the site can be calculated at 100,000.

If you were a property developer and you bid above the Residual Value of the site at say 125,000, you would automatically be running at a loss of 25,000 based on the above method.Thecost methodor'Base Value'of a property is the simple cost of the site it is built on and the cost of building the property itself. Included in the cost of building are items such as labour, fit out and any taxes due. The base cost is often a good starting point for valuations required for insurance, scheduling or budgeting.

Thereinstatement cost used for insurance purposes are an extension of the base value, allowing for demolition and site clearance fees also. In the reinstatement cost however, the price of the land is not included.

International Commercial Terms (INCOTERMS)IntroductionInternational commercial terms or Incoterms are a series of sales terms that are used by businesses throughout the world. Incoterms are used to makeinternational tradeeasier. They are used to dividetransaction costsand responsibilities between buyer and seller. Incoterms were introduced in 1936 and they have been updated six times to reflect the developments in international trade.The latest revisions are sometimes referred to asIncoterms 2000. There are thirteen Incoterms that are used by businesses and are used in four different areas.Departure (Group E) EXW Ex WorksEXW means Ex Works and is followed by a named place, for example EXW Dallas. EXW means the seller's responsibility is to make the goods available at the seller's premises. The seller is not responsible for loading the goods on the vehicle provided by the buyer, who then bears the full cost involved in bringing the goods from there to the desired destination.Main Carriage Not Paid By Seller (Group F) FCA Free CarrierFCA means Free Carrier and is followed by a named place, for example FCA Brownsville. FCA means the seller fulfills its obligation to deliver when it has handed over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place. If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into its charge. FAS Free Alongside ShipFAS means Free Alongside Ship and is followed by a named port of shipment, for example FAS New York. FAS means the seller is responsible for the cost of transporting and delivering goods alongside a vessel in a port in his country. As the buyer has responsibility for export clearance, it is not a practical incoterm for U.S. exports. FAS should be used only for ocean shipments since risk and responsibility shift from seller to buyer when the goods are placed within the reach of the ship's crane. FOB Free On BoardFOB meansFree On Boardand is followed by the named port of shipment, for exampleFOBBaltimore. With FOB the goods are placed on board the ship by the seller at a port of shipment named in the sales agreement. The risk of loss of or damage to the goods is transferred to the buyer when the goods pass the ship's rail, i.e. off the dock and placed on the ship. The seller pays the cost of loading the goods.Main Carriage Paid By Seller (Group C) CFR - Cost And FreightCFR means Cost and Freight and is followed by a named port of destination, for example CFR Sydney. CFR requires the seller to pay the costs and freight necessary to bring the goods to the named destination, but the risk of loss or damage to the goods, as well as any cost increases, are transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. Insurance is the buyer's responsibility. CIF - Cost, Insurance And FreightCIF means Cost, Insurance and Freight and is followed by a named port of destination, for example CIF Miami. CIF is similar to CFR with the additional requirement that the seller purchases insurance against the risk of loss or damage to goods. The seller must pay the premium. Insurance is importantin international shipping, more than domestic US shipping, because U.S. laws generally hold acommon carrierto be liable for lost or damaged goods. CPT Carriage Paid ToCPT means Carried Paid To and is followed by a named place of destination, for example CPT Kansas City. CPT means that the seller must pay the freight for the carriage of the goods to the named destination. The risk of loss or damage to the goods and any cost increases transfers from the seller to the buyer when the goods have been delivered to the custody of the first carrier, and not at the ship's rail. CIP - Carriage And Insurance Paid ToCIP means Carriage And Insurance Paid To and is followed by a named place of destination, for example CIP Boston. CIP has the same incoterm meaning as CPT, but in addition the seller pays for the insurance against loss of damage.

Arrival (Group D) DAF Delivered At FrontierDAF means Delivered At Frontier and is followed by a named place, for example DAF El Paso. DAF means that the sellers responsibility is complete when the goods have arrived at the frontier but before the customs border of the country named in the sales contract. This buyer is responsible for the cost of the goods to clear customs. DES - Delivered Ex ShipDES means Delivered Ex Ship and is followed by a named port of destination, for example DES Vancouver. DES means the seller shall make the goods available to the buyer on board the ship at the place named in the sales contract. The cost of unloading the goods and associated customs duties are paid by the buyer. DEQ - Delivered Ex QuayDEQ means Delivered Ex Quay and is followed by a named port of destination, for example DEQ Los Angeles. DEQ means the seller has agreed to make the goods available to the buyer on the quay at the place named in the sales contract. DDU Delivered Duty UnpaidDDU means Delivered Duty Unpaid and is followed by a named place of destination, for example DDU Topeka. The seller has to bear the costs involved in shipping the goods as well as the costs and risks of carrying out customs formalities. The buyer pays the duty and has to pay any additional costs caused by its failure to clear the goods for import in time. DDP - Delivered Duty PaidDDP means Delivered Duty Paid and is followed by a named place of destination, for example DDP Bakersfield. The seller has to pay the costs involved inshipping the goodsas well as the costs and risks of carrying out customs formalities. The seller pays the duty and the buyer has to pay any additional costs caused by its failure to clear the goods for import in time. DDP should not be used if the seller is unable to obtain an import license.