Approaches to Asset Valuation in the Government Trading Enterprises of Bangladesh
AbstractMethodology adopted for asset valuation is important to know how comparable the rates of profit are over time and between companies. Higher profitability calculated on the basis of book value of assets or historical cost basis may in fact conceal the erosion of the value of investment due to inflation over time. On the other hand, technical advancement may have significantly reduced the replacement cost of assets. Consequently, new comers in the industry may appear to be doing better compared to the existing firms if they do not adopt replacement cost valuation of assets. However, replacement value may differ if individual components of a facility are replaced separately from the replacement cost for the entire facility. Replacement cost is not just cost of reproducing the existing plant or plant in question. When replaced in its entirety new features are sometimes added and the facility may work better. In either case, replacement cost may in some cases be larger than the net present value of the future stream of income (NPV) from the existing plant or the net resale value (NRV) of that. In such cases, calculation of profit on the basis of replacement cost would underestimate the performance of such firms. In order to address such issues of comparative performance assessment an increasing number of economists, policy makers and accountants have recommended the use of deprival value method for valuation of assets. The deprival value is the lesser of the depreciated replacement cost and economic value of assets to the business. The economic value, in turn, is larger of the NPV and the NRV. This paper presents a comparative picture of the major asset valuation methods and discusses their relevance in context of the Government Trading Enterprises of Bangladesh.
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Bibliographic InfoPaper provided by American International University-Bangladesh, Office of Research and Publications (ORP) in its series AIUB Bus Econ Working Paper Series with number AIUB-BUS-ECON-2008-16.
Date of creation: May 2008
Date of revision: May 2008
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-13 (All new papers)
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- George J. Stigler, 1963. "Capital and Rates of Return in Manufacturing Industries," NBER Books, National Bureau of Economic Research, Inc, number stig63-1, octubre-d.
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