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Replacement cost and market value

Replacement cost and market value Purpose – Several problems arise from the current valuation standards and guidance in relation to the replacement cost method and they can be classified as definitional and methodological. Definitional problems include confusion over the precise meaning of the terms cost, price and value and clarification of the economic concepts of substitution and “highest and best use” in the cases of market‐based and replacement cost methods. Methodological problems include the difficulty in finding market‐derived inputs, particularly when estimating depreciation, and the need to make end adjustments. These matters raise the question as to whether a replacement cost method is compatible with a market basis of value. This paper aims to address this issue. Design/methodology/approach – The paper reviews academic literature and professional practice guidance in relation to the replacement cost method of valuation and the market value basis of valuation. Findings – Defining replacement cost as a method of estimating market value rather than a separate basis of value blurs the distinction between cost and value. This paper argues that market value assumptions do not hold in the case of the replacement cost method. Originality/value – The paper seeks to stimulate debate on the current professional guidance for the use of the replacement cost method of valuation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Property Investment & Finance Emerald Publishing

Replacement cost and market value

Peter Wyatt
Journal of Property Investment & Finance , Volume 27 (6): 10 – Sep 25, 2009
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References (11)

Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
1463-578X
DOI
10.1108/14635780910993186
Publisher site
See Article on Publisher Site

Abstract

Purpose – Several problems arise from the current valuation standards and guidance in relation to the replacement cost method and they can be classified as definitional and methodological. Definitional problems include confusion over the precise meaning of the terms cost, price and value and clarification of the economic concepts of substitution and “highest and best use” in the cases of market‐based and replacement cost methods. Methodological problems include the difficulty in finding market‐derived inputs, particularly when estimating depreciation, and the need to make end adjustments. These matters raise the question as to whether a replacement cost method is compatible with a market basis of value. This paper aims to address this issue. Design/methodology/approach – The paper reviews academic literature and professional practice guidance in relation to the replacement cost method of valuation and the market value basis of valuation. Findings – Defining replacement cost as a method of estimating market value rather than a separate basis of value blurs the distinction between cost and value. This paper argues that market value assumptions do not hold in the case of the replacement cost method. Originality/value – The paper seeks to stimulate debate on the current professional guidance for the use of the replacement cost method of valuation.

Journal

Journal of Property Investment & Finance – Emerald Publishing

Published: Sep 25, 2009

Keywords: Replacement costs; Market value; Standards

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