Net Reliable Value Method
This method business is value at Net realizable value (market
value). This method is better than Net book value because it is based on the
market price. The other advantage of this method is that it is relatively easy
and does not involve complex calculation. It is very similar to the Net book
value and asset under this method is value NRV instead of cost.
Limitation of Net Realizable
Valuation
1. Difficult to Establish
NRV
In some asset it is difficult to determine the net releasable
value especially for old asset and that asset for which no active market exit. For
example you want to sell old furniture and you give an advertisement in the newspaper
and you receive different price Quotes from $ 100 to $ 310.
2. Goodwill
Ignored
In this method like Net book value method good will is
ignored which is an important element in business valuation especially at the
time of acquiring and disposing of business. In some transaction the amount of
Goodwill alone is more than total of other assets.
Example of Net Realizable value
|
|
Cost
|
NRV
|
|
Plant &
Machinery
|
5
Million
|
8
million
|
|
Stock & Cash
|
3
Million
|
4
million
|
|
Loan from Bank
|
2
Million
|
2
million
|
|
Trade Payable
|
1
Million
|
1
million
|
Solution
1. Calculate total
Asset & Liabilities
|
Asset
|
Million (NRV)
|
Liabilities
|
Million
|
|
Plant &
Machinery
|
8
|
Loan
|
2
|
|
Stock & Cash
|
4
|
Trade Payable
|
1
|
|
Total
|
12
|
Total
|
3
|
2. Value of business
|
Asset
|
Liabilities
|
Equity/business value
|
|
8 Million
|
3 Million
|
= 12-3
=9 million
|
