Unusual problem this; seeking to verify the correctness of the calculation but not whether the correct method was chosed for the calculation.
An asset was sold by Co.A in Country A to Co.B in Country B. Transfer Pricing/Fair Market Values were to be used in the calculation of the price. Co. A had to sell, and Co B had to buy - the only problem was the price.
Asset historic cost - EUR2,000,000 but the price was calculated at EUR7,000,000 calculated as follows;
Year 1 PV income 1,000,000
Year 2 PV income 1,000,000
Year 3 PV income 1,000,000
Year 4 PV income 1,000,000
Year 5 PV income 1,000,000
Year 6 PV income 1,000,000
Year 7 PV income 1,000,000
Year 8 PV income 1,000,000
Year 9 PV income 1,000,000
Total PV Income 9,000,000
Price of asset = Cost 2,000,000 plus 50% 9,000,000 i.e. 6,500,000
Attempted reasoning of this calculation is Max value buyer will receive in deal is 2,000,000 plus 9,000,0000 but minimum value buyer will receive is 2,000,000 plus Nil PVs (assume break-down of asset) - > middle is 2,000,000 plus 1/2 PVs ie 6,500,000.
Is this a correct calculation?
Would a better NPV calculation serve to deduct the cost of the asset from the calculation of the Total PV Income ie 9,000,000 less 2,000,000 = 7,000,000 and start again?
Ie max value buyer will receive in deal is 2,000,000 plus 7,000,0000 but minimum value buyer will receive is 2,000,000 plus Nil PVs (assume break-down of asset) - > middle is 2,000,000 plus 1/2 PVs ie 5,500,000.
(I know there's arguments re depreciation & tax-depreciation but am ignoring these for the moment)
An asset was sold by Co.A in Country A to Co.B in Country B. Transfer Pricing/Fair Market Values were to be used in the calculation of the price. Co. A had to sell, and Co B had to buy - the only problem was the price.
Asset historic cost - EUR2,000,000 but the price was calculated at EUR7,000,000 calculated as follows;
Year 1 PV income 1,000,000
Year 2 PV income 1,000,000
Year 3 PV income 1,000,000
Year 4 PV income 1,000,000
Year 5 PV income 1,000,000
Year 6 PV income 1,000,000
Year 7 PV income 1,000,000
Year 8 PV income 1,000,000
Year 9 PV income 1,000,000
Total PV Income 9,000,000
Price of asset = Cost 2,000,000 plus 50% 9,000,000 i.e. 6,500,000
Attempted reasoning of this calculation is Max value buyer will receive in deal is 2,000,000 plus 9,000,0000 but minimum value buyer will receive is 2,000,000 plus Nil PVs (assume break-down of asset) - > middle is 2,000,000 plus 1/2 PVs ie 6,500,000.
Is this a correct calculation?
Would a better NPV calculation serve to deduct the cost of the asset from the calculation of the Total PV Income ie 9,000,000 less 2,000,000 = 7,000,000 and start again?
Ie max value buyer will receive in deal is 2,000,000 plus 7,000,0000 but minimum value buyer will receive is 2,000,000 plus Nil PVs (assume break-down of asset) - > middle is 2,000,000 plus 1/2 PVs ie 5,500,000.
(I know there's arguments re depreciation & tax-depreciation but am ignoring these for the moment)