Asset Valuation

A beautiful find.


With bankruptcies and restructurings soaring, billions of dollars’ worth of distressed corporate assets are up for sale. But establishing their net present value (NPV) is tricky, as precise valuations hinge on complex calculations–which consume critical time in deal negotiations, especially in bidding for a grab bag of items.

Buried in valuation consultant Jay B. Abrams’s new book, Quantitative Business Valuation: A Mathematical Approach for Today’s Professionals, is a quick way to estimate the collective NPV of diverse assets. In essence, Abrams pushes the investment horizon out to infinity, rather than coming up with a lowest common multiple. In practice, the methodology would let, for example, a company compare the NPV of a new ship with 25 years of useful life against the NPVs of used ships that are 1, 2, and 3 years old in “about a minute,” claims Abrams. The alternative method of getting a common length of time, he adds, would require calculating 13,800 years of cash flows.

The slick equation isn’t a perfect solution. Abrams’s approach “definitely cuts down on the calculations, but it doesn’t solve the inherent problem of assumptions,” says Jim Mahar, a finance professor at St. Bonaventure University, in Olean, N.Y. “If you mess up the cost of capital or growth rate, you’re going to end up with the wrong decision.”

In any event, Abrams’s method came in handy for Ice Management Systems Inc. (IMS) last year, when the company considered buying a testing facility it had been leasing time from.

Ostensibly, IMS had little leverage. The seller was going to mothball the facility unless the aircraft-deicing-system maker anted up about $9 million, based on discount cash-flow rates calculated at 12 percent. Working with Abrams, IMS was able to factor in complex future costs–six different types of equipment and structures that would need replacing at varying times during the next 45 years. The result: the seller’s discount rate was too low, and the price tag was $3.5 million too high.

The owner ultimately killed the deal, but kept the plant open, says IMS CEO Mark Bridgeford. “They just couldn’t refute Jay’s numbers.”

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