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CMA Final · Strategic Performance Management and Business Valuation · Valuation of Assets and Liabilities

Under the replacement cost approach to valuing an asset, which of the following best describes the value arrived at?

Replacement cost approach values an asset at the current cost of acquiring an equivalent asset giving similar utility, reduced for physical depreciation and obsolescence. It is not historical book value, discounted cash flow value, or forced-sale value, since it depends on present market prices of substitutes.

  1. AThe cost of acquiring an equivalent asset with similar utility at current prices, adjusted for depreciation and obsolescenceCorrect
  2. BThe original historical cost less accumulated depreciation as per books
  3. CThe present value of the asset's expected future cash flows discounted at the cost of capital
  4. DThe price the asset would fetch if sold in a forced sale within a short period

Explanation

Replacement cost values an asset by what it would cost today to obtain one with equivalent utility, after allowing for physical wear and obsolescence. Book value uses historical cost, which is why option B is wrong. Option C describes the income approach and option D describes liquidation value.

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