The cost approach of business valuation is useful, for asset intensive firms, valuing holding companies as well as distressed entities that are not worth more than their overall net tangible value. Comment on the stateme

The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction, unless undue time, inconvenience, risk or other factors are involved. This approach tends to determine the business value on the basis of value of assets of the business. It is specifically useful for valuing business that are not worth more than their overall net tangible value e.g. Asset intensive firms , e.g. physical assets (e.g., real estate, machinery) dominate value. Examples: manufacturing, infrastructure. Holding companies - when the company's value is derived from its investments and subsidiaries, not operations. Distressed entities - when the business is no longer a going concern and liquidation or net asset value is more relevant. The cost approach should be applied and afforded significant weight under the following circumstances: participants would be able to recreate an asset with substantially the same utility as the subject asset, without regulatory or legal restrictions, and the asset could be recreated quickly enough that a participant would not be willing to pay a significant premium for the ability to use the subject asset immediately (nothing special in the assets). the asset is not directly income-generating and the not in unique nature of the asset makes using an income approach or market approach unfeasible. The value lies primarily in tangible assets. The methodologies adopted under cost approach are as under: Replacement Cost Method Reproduction Cost Method Summation Method-Sum of part Method.