More than one value...
At a recent conference the senior investment officer of a large financial institution asked "Why is it we had appraisals for real estate assets that didn't reflect the huge drop in values that was coming? Why did the appraisers give us those inflated values?"
He had not foreseen the crash and his clients lost millions of dollars, and yes, partly due to incorrect values but mostly due to the fact that he had asked the appraiser the wrong question. The values for which the investment officer was looking would have assisted with the company’s strategic planning.
Every asset has several values. Therefore, when determining an asset's value it is important to know the intended use of the value. A list of some values follows:
- Use Intrinsic Value to determine the inherent value of an asset. It determines the direction the Market Value of an asset will take in the mid-term.
- Use Investment Value when determining the value of the asset to a specific owner with specific investment requirements. The collectivity of individual investment values determines the current market.
- Use Liquidation Value when determining the value that might be realized under liquidation conditions. In some situations, the forced liquidation value might equal the Market Value, but typically the time constraint imposed in such a situation necessitates a discount on the sale price. Note that if the situation is an orderly liquidation, then the value is more apt to equal the Market Value.
- Use Market Value when determining the value the asset would fetch on the open market under voluntary sale conditions. There is always a market, even during the worst period of a "down cycle", and effecting a sale is typically only a question of price.