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Valuation Quizzes > Valuation - DRC Method Quiz > Flashcards

Valuation - DRC Method Quiz Flashcards

1
Q

What is another name for a Depreciated Replacement Cost method of valuation? (3 marks)

  1. Cost
  2. Profits
  3. Residual
  4. DCF
  5. Contractors
  6. Method of last resort
A
  1. Cost
  2. Contractors
  3. Method of last resort
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2
Q

How does the Red Book describe the DRC method?

A

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

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3
Q

What type of properties is a DRC usually used for?

A

Owner occupied or specialised property rarely sold on market.

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4
Q

When is the DRC method typically used? (2 marks)

  1. Where there is an uplift due to alternate use.
  2. Where there is no useful or relevant evidence due to the specialised nature of the asset.
  3. Where there is no comparable alternative.
A
  1. Where there is no useful or relevant evidence due to the specialised nature of the asset.
  2. Where there is no comparable alternative.
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5
Q

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

A

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

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6
Q

What types of property might you use a DRC for?
(5 marks)

  1. Airport
  2. Restaurant
  3. Oil refinery
  4. Steelworks
  5. Shopping centre
  6. Shipbuilding yard
  7. Bar
  8. Public sector buildings (not capable of being valued by another method)
A
  1. Airport
  2. Oil refinery
  3. Steelworks
  4. Shipbuilding yard
  5. Public sector buildings (not capable of being valued by another method)
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7
Q

What is included in the cost to replace the asset?

3 marks

A
  1. Cost to replace the land (site value)
  2. Other costs incurred by the buyer, e.g. delivery, transportation, installation, commissioning, unrecoverable duties and taxes
  3. Cost to replace the building (improvements to the land)
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8
Q

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

A

Gross replacement cost

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9
Q

How do you assess site value?

A

Least expensive site suitable and appropriate for proposed operations

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10
Q

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

A

Modern equivalent

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11
Q

Do you take into account other/associated costs?

A

Yes

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12
Q

What might these costs include? (5 marks)

  1. Build costs
  2. Finance costs
  3. Site preparation costs
  4. All VAT costs
  5. Professional fees
  6. VAT (only if it is irrecoverable)
A
  1. Build costs
  2. Finance costs
  3. Site preparation costs
  4. Professional fees
  5. VAT (only if it is irrecoverable)
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13
Q

Where could you find build costs from? (2 marks)

  1. BCIS
  2. Rough workings - they don’t need to be specific
  3. Speak to a QS
A
  1. BCIS

2. Speak to a QS

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14
Q

What should you deduct after assessing the replacement cost?

A

Depreciation allowance (obsolescence)

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15
Q

Why do you deduct depreciation?

A

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

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16
Q

What are the key types of depreciation allowance/obsolescence? (3 marks)

  1. Physical obsolescence
  2. External obsolescence
  3. Economic obsolescence
  4. Practical obsolescence
  5. Functional obsolescence
A
  1. Physical obsolescence
  2. Economic obsolescence
  3. Functional obsolescence
17
Q

What is physical obsolescence?

A

Wear and tear, potentially due to lack of maintenance

18
Q

What is functional obsolescence?

A

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

19
Q

What is economic obsolescence?

A

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

20
Q

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

A

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

21
Q

What are the main ways to calculate depreciation?

3 marks

A
  1. Straight Line
  2. S Curve
  3. Reducing Balance
22
Q

Would you account for development potential in a DRC?

A

No - you look at the least expensive site

23
Q

What is the final stage of a DRC?

A

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

24
Q

How does a reinstatement cost assessment differ from a DRC?

A

Doesn’t include land or depreciation

25
Q

What is the purpose of a reinstatement cost assessment?

A

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

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