PE Valution - DRC Method

Question 1

What is another name for Depreciated Replacement Cost method of valuation?

Answer 1

Cost
Contractors
Method of last resort

Question 2

How does the Red Book describe the DRC method?

Answer 2

Current cost of replacing an asset with its modern equivalent asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation

Question 3

What type of properties is a DRC usually used for?

Answer 3

Owner occupier or specialised property rarely sold on market

Question 4

When is a DRC method typically used?

Answer 4

Where there is no useful or relevant evidence due to the specialised nature of the asset

Where there is no comparable alternative

Question 5

Can you undertake a valuation of a specialised asset using any other method?

Answer 5

Yes - if there is sufficient direct market evidence (using the sales comparison or income capitalisation approaches)

Question 6

What types of property might you use a DRC for?

Answer 6

Airport
Oil refinery
Steelworks
Shipbuilding yard
Public sector buildings (not capable of being valued by another method)

Question 7

What is included in the cost to replace the asset?

Answer 7

Cost to replace the land (site value)
Other costs incurred by the buyer, e.g. delivery, transportation, installation, commissioning, unrecoverable duties and taxes
Cost to replace the building (improvements to the land)

Question 8

What is the term for the cost to replace the asset?

Answer 8

Gross replacement cost

Question 9

How do you assess site value?

Answer 9

Least expensive site suitable and appropraite for proposed operations

Question 10

On what basis do you assess the cost to replace the building?

Do you take into account other/associated costs?

Answer 10

Modern equivalent

Yes

Question 11

What associated costs are included on the cost to replace a building?

Answer 11

Build costs
Site preparation costs
Professional fees
Finance costs
VAT (only if it is reccoverable)

Question 12

Where would you find build costs from?

Answer 12

BCIS
Speak to a QS

Question 13

What should you deduct after assessing the replacement cost?

Answer 13

Depreciation allowance (obsolescence)

Question 14

Why do you deduct depreciation?

Answer 14

To reflect differences with modern equivalent, i.e. how the market would view the asset

Question 15

What are the key types of depreciation allowance/obsolesence?

Answer 15

Physical obsolescence
Functional obsolescence
Economic obsolescene

Question 16

What is phyiscal obsolescence?

Answer 16

Wear and tear, potentially due to a lack of maintenance

Question 17

What is functional obsolescence?

Answer 17

Design or specification no longer fulfils the function for which it was originally designed

Question 18

What is economic obsolescence?

Answer 18

Impact of changing economic conditions on the demand for goods or services produced by the asset

Question 19

What else do you need to consider in relation to depreciation?

Answer 19

Asset life - an asset with a longer remaining life will be worth a higher % of a new replacement

Question 20

What are the main ways to calculate depreciation?

Answer 20

Straight line
Reducing balance
S-curve

Question 21

Would you account for development potential in a DRC?

Answer 21

No - you look at the lease expensive site

Question 22

What is the final stage of a DRC?

Answer 22

Stand back and look - sense check and further adjustments (not already made)

Question 23

How does a reinstatement cost assessment differ from a DRC?

Answer 23

Doesn’t include land or depreciation

Question 24

What is the purpose of a reinstatement cost assessment?

Answer 24

Puts insured in the same financial position after loss as before loss