Valuation Problems

Valuating the asset is the important factor in decision making. Valuation is the one that investor primarily focuses during investment. Valuation is essential before investment the investment made without valuation will yield huge losses.

 Some of the problems faced while valuating the asset are,

• The values of the asset are highly volatile. It is difficult to identify the cost. The asset prices are subjected to demand supply variation. It is difficult to predict the demand in most of the cases. Demand is highly volatile based on the market condition and economical conditions.
• The tax and other cost related to the asset are variable. It keeps changing with the government policies. Investor while estimating the cost cannot predict these changes. It is important to include these cost while the estimation of value of the asset. These costs have a huge impact in the price of the asset. The complex factor in this is that the taxes vary with asset as well. The tax won’t be same for different assets. It won’t be same for different area as well, for ex the tax paid to an asset at one part won’t be the same in other part.
• The risks involved in an asset are usually difficult to calculate. The risk is a huge factor in asset valuation estimation. The assets that have a huge yielding capacity may have a huge risk associated with it. If the investor goes by the yielding capacity alone then he might end up making huge loss as well, whereas the asset with less risk and lesser yielding capacity may yield more than the riskier one. The problem with risk evaluation is difficult to estimate the risk and the level to which it can impact the yield.
• Market risk and other such inestimable risk are difficult to be included in the asset valuation. These risks however cannot be ignored as these risks are immediate and have a huge impact on the yielding as well.

Question

• What are the problems faced in calculating the asset value?
• What is the need for valuation of the asset?