Asset Based Valuation
Net Book Value Method
In this method of valuation the simple accounting concept of
equity is used i.e. Value of business = Asset – Liabilities. This method is
very simple to understand and calculate. Many finance manager like this method
due to familiarity of the accounting concept used in this type of valuation.
Limitation of Net Book
Value
1. Historical Cost
Assets are appearing
in the books of accounts at historical cost and therefore market price which is
more relevant in the business valuation is ignored in this method.
2. Depreciation Policy
Depreciation policy of the organization would have a great
impact on the value of business. Many assets may be appearing at lower depreciated
value which may have greater value in use or market value.
3. Goodwill
This method does not take into account the Goodwill. it is to
be noted that in buy and disposal decision goodwill value have critical
importance and play a vital role in determine the value of business.
Example of Net book
Value
|
Plant & Machinery
|
5
Million
|
|
Stock & Cash
|
3
Million
|
|
Loan from Bank
|
2
Million
|
|
Trade Payable
|
1
Million
|
What would be the value of business?
Solution
1. Calculate total
Asset & Liabilities
|
Asset
|
Million
|
Liabilities
|
Million
|
|
Plant & Machinery
|
5
|
Loan
|
2
|
|
Stock & Cash
|
3
|
Trade Payable
|
1
|
|
Total
|
8
|
Total
|
3
|
2. Value of business
|
Asset
|
Liabilities
|
Equity/business value
|
|
8 Million
|
3 Million
|
= 8-3
=5 million
|
