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Wealth Marine







3. Features of standard approaches application for vessel evaluation

In the methodology of applied economic evaluation it is possible to allocate three definitions of market value concept: standard, algorithmic and theoretical.
           In the bases of the theoretical definition there is an equality of the value in use and the value in exchange, which at the exchange moment are equal among themselves and the market value. More exactly, from the seller point of view the value in exchange exceeds the value in use of a distinguishable size, that correlates with margin error estimations, but from the buyers point of view, on the contrary, the value in use exceeds the value in exchange. Market value in the process of exchange is defined in the range of values between the value in use and the value in exchange.
           Apparently, the theoretical definition of market value is primary, and formation of other definitions of value, including industrial definitions, or subject definitions in special spheres, should be made keeping in mind of the market value theoretical definition as the basis of evaluation.
           Specified definitions of value, except the theoretical definition, are more convenient in respect of application.
           The concept of market value is standard and formulated under Federal appraisal standards or under other comparable specifications. At the same time standard definition is of little use in the expert purposes.
           Algorithmic definition of market value can be a sequence of its determination recommended in the modern circumstances according to the standards by three independent approaches with the account the subsequent expert coordination of the results obtained using these approaches or the preliminary choice of the approach corresponding to a subject among standard approaches, if such preliminary choice of the approach is allowed under standards of appraisal.
           In that specific case an adapted instruction can serve as algorithmic evaluation and this instruction is created according to standards on the bases of independent approaches combined by the expert opinion after or before the determination of the market value, taking into account, that this possibility of preliminary choice a separate approach corresponding to the subject, if this possibility is supposed to be according to standard, is also the way of the expert combination of independent approaches.
           It should be noticed, that the structure of independent approaches within the limits of algorithmic evaluation is based on the concepts of evaluation and could be the subject of the analysis from the philosophical and historical points of view.
           In days of the Middle Centuries the ethical standards which were covered by philosophy of the newThomism, did anticipate the possibility of obtaining profit which negatively regarded as enslaving, and noble people were not expected to sell their property for the price more expensive than the price of purchasing. The price, thus, corresponded to the set of expenses.
           In administratively regulated economy, despite the fact that the profit can be a subject of evaluation, the medieval way of evaluation virtually remains as the sums of expenses have to be saved as the operation cost and investments are paid from the state budget, the income arrives to the budget where the financial result is formed, and the company actually does not possess the financial result.
           Plausible concepts to accept no more, than one has spent, in the present still remain in the sphere of hired labor. Workers receive as much, as is spent for restoration of their energy and if there is a surplus the investment and commercial activity appears.
           In the activity of businessmen the Christian morals concerning incomes influence with some reservations. In process of material benefits accumulation and in connection with the limited possibilities of a person in respect of material consumption, the relation of volume of consumption to the volume of accumulation naturally decreases, and, at a rather high level of accumulation there is separation of consumption level from capitalization. In a society, advanced from the different points of view, citizens with different property statuses consume proportional quantity of material benefits.
           On the other hand, there are no limits for the consumption possibilities out of material sphere, including professional and creative interests of the person. The maximum satisfaction of spiritual interests is brought by professional work, including the work of businessmen in management of that part of the material property in relation of which, in view of saturation, they do not realize a possibility of consumption and extraction from the turnover in process of expenditure.
           Thus, businessmen actually are the managers disposing of property, and the basic part of the property, which falls outside the limits of their own consumption, is run, kept and collected by them in the interests of other part of the society.
           Along with hired workers, businessmen receive the material compensation that doesnt excess the amount that they have spent, leaving out investment activity which is not a part of personal consumption.
           In the periods of Renaissance and economy development there is a possibility of comprehensive value estimation with the account the factor of the investment activity, for example using three independent approaches. That sort of evaluation harmoniously enters dialectics, which can be defined, as systems of triple concepts laws (for example the triple concepts: the individual the especial the general, etc.), socalled triads that corresponds to Hegels philosophy.
           Therefore many ideas in applied economics are based on triple alternatives: besides three independent approaches, there are also three theoretical concepts, corresponding to value the value in use, the value in exchange and the market value; three rights of the ownership the property right, the economic management and the administration; three property rights the possession, the distribution and the use; three kinds of deterioration physical, functional and external; three basic economic indexes income, operation cost and investments; etc.
           As, from system positions, it is possible to define the market value from three points of view independently: methodological, algorithmic or standard, it leads to an axiom based on a belief that market value, from all specified points of view (and, probably, others points of view), is a uniform concept.
           To some extent, appraisal is the use of the basic axiom which is specified above. Studying of the basic axiom and the analysis of conformity with the value concept by three independent definitions is an important incentive for the development of the applied expert evaluation methodology that means that the concepts of evaluation and approaches are developed and improved to bring independent value definitions into compliance based upon theoretical value concept. It is, exactly, the system criterion of the evaluation validity.
           Use of various approaches for the vessel evaluation reduces influence of errors, but can lead to a polysemy of the received results.
           The definition of the average weighed value is made at the final stage for generalization of the results usually there is an insignificant spread.
           If case of a significant spread, the additional analysis for the purpose of an exception of the least authentic result and determination of preferable value is required.
           The causes of the discrepancy of values received by different approaches are the variety of used data for an evaluation: the part of data is used for comparison with analogues, the part for the determination of the net operating income, and the part for an estimation of reproduction cost and depreciation etc.
           The necessity of averaging (weighing) of results at the final stage of an evaluation is a result of breaking of logic ties and imperfection of used techniques.
           It is expressed by the fact that each of approaches besides the initial data defined on the basis of market research and on the basis of the evaluated vessel characteristics analysis, contains indexes of subjective nature which can be proved, only by extending borders of the subject, increasing number of the methodological concepts and interrelations among them within possibilities of the expert.
           The specified drawback of any approach cannot be eliminated completely but there is a choice of approaches for vessel evaluation (or other asset of the marine company) when subjectivity is as minimum as possible, and various methods are connected in an integrated algorithm, and each of them is used in that part of the expert work for which it is most valid.
           The accuracy of the results of estimation of various approaches in many respects depends on the vessel years.
           As the critical analysis of possibilities of standard approaches application for vessels estimation it is necessary to note the following.
           The cost approach is more correct for new vessels when there is insignificant depreciation in view of the following reasons.
           1. In process of commercial vessel ageing the replacement cost (or market value of a new vessel) can be replaced completely by depreciation, and the resultant value estimation representing the difference of the new vessel value and depreciation is much less than new vessel value and the depreciation, that is, the determination of the market value of not a new vessel based on cost approach is called as the mathematical problem of small difference of the big values and owing to the specified circumstances is inexact.
           2. The depreciation of a commercial vessel is presented much in accumulation of value distinctions of initially identical vessels, having identical age rather than in value reduction.
           With appropriate care on the part of a ship-owner and with sufficient expenses of a ship-owner for the repair, the deterioration can be insignificant, despite the age of vessels life. Circumstances of the opposite nature are possible too.
           Apparently, rates of deterioration of new vessels roughly correspond to the compensation rates.
           3. With the vessels years of life the information of the expenses for her construction is lost due to the changes of economic situation and in projects of the newly built vessels.
           Besides, the depreciation accumulates over the time, and the error of value estimation based on cost approach increases, since the depreciation is subtracted when estimation is made based on cost approach from the initial value of commercial vessel (the regenerative cost, the replacement cost or the new vessel market value, depending on the accepted definite assumptions) and at the maximum age the depreciation becomes equal to this initial value.
           Thus, at the mandatory age the vessel value (or other marine company asset), determined by the cost approach as the small difference of the big values (initial value and the accumulated depreciation), in mathematical sense is inexact result that limits possibilities of application of the cost approach for not a new vessels (or other not new assets).
           The schematic graphs (fig. 3), characterizing within life time of commercial vessel, the dependence of the value on age, when the value is determined by standard independent approaches, the more simply correspond to the assumptions usual for appraisal.


Unlike the vessels value (or other assets of the marine company) that decreases over the time, in some other subject domain depreciation is less appreciable over the time concerning real estate estimation (that is the property complex as a part of constructions and occupied territory lots), since the real estate is usually more durable and the factor of value changes over the time for the real estate in a greater degree are the external macroeconomic changes rather than self internal phenomena (structural or functional).
           The formal difference of schematic dependence of the value on the vessel age, evaluated by the cost approach, from dependence of the value determined based on comparable sales approach, is caused by a hypothesis of the linear proportional accumulation of the commercial vessel irremovable depreciation over the time. The specified difference is easily enough eliminated by use of a nonlinear proportion for estimation of irremovable depreciation.
           There are more important causes of difference of dependence on the age of the vessel value determined based on income approach, on the one hand, and the dependences determined based on comparable sales and income approaches, on the other hand.
           These causes of difference are connected with the fact, that according to the income approach, the vessel value (or other asset of the marine company) corresponds to the present value of the cash flow determined on the basis of discounting by financial functions, which has steady characteristic except the limiting age which is coming nearer to life time.
           It is necessary to pay attention, that stability of the value dependence on the age of the vessel (or other asset of the marine company) actually is not observed according to marketing researches and on the basis of application for an estimation of comparable sales approach or cost approach, and by these approaches the value decreases over the time in the present value, that is, the values of a new and not a new vessels considerably differ, though the evaluation based on income approach can not have distinctions, since the efficiency of a commercial vessel changes over the time insignificantly, and the capitalization rate, in a wide range of age, varies a little and tends to increase, when the vessel years come nearer to a limiting value, owing to the increase of the compensation fund factor as the component of the capitalization rate.
           The same conclusion of the vessel value (or other asset of the marine company) stability over the time, evaluated based on income approach, can be received, if the method of the direct capitalization is applied unlike the method of capitalization of the discounted cash flow of the net operating income.
           The value stability of vessel or other isolated real asset of the marine company over the time is a mathematical property of present values of cash flows determined on the basis of wellknown discount financial functions.
           Relative conformity of values determined by independent approaches is a characteristic feature that rather corresponds to an interval from A to B of the vessel age averages. It is necessary to underline, that just middleaged vessels basically are offered for sale at the second hand market.
           Concerning new vessels which age makes from 0 to A (fig. 3), it is necessary to notice, that the income approach is characterized by value underestimation, that is the new vessel usually values more than the present value of a cash flow of the predicted income.
           For the oldest vessels, age of which is comparable with life time T, the value underestimation can at this time corresponds to calculation based on cost approach, and the income approach is more logical both for value estimation and for the life time, the forecast of which for an old vessel is closely connected with economic efficiency estimation.
           For an age limit of a commercial vessel the estimation based on income approach essentially depends on life time evaluation, and commercial risks tend to grow in view of probability of latent defects accumulation.
           Unlike of the cost approach, the income approach is more adequate for application estimating not a new vessel, since the costs for her construction influence the market value over the time to a lesser degree, than the present profitableness, data of which collected with the vessel age.
           The vessels values decrease over the time usually essentially more intensively, than, for example, the values of the real estates, depreciation collects faster, and the life time is less.
           The profitableness of not a new vessels usually slightly differs from the profitableness of new vessels. Therefore the vessels market value, evaluated based on income approach, varies over the time less considerably, than the value determined by the methods of the cost approach.
           For the stated reasons, it is logical to consider, that the market value determined based on income approach is more exact for not a new vessels and it is less correct for new.
           As vessels number, offered for sale at the second hand market, the greatest in the range from A to B of the averages of age, the comparable sales approach is less logical for new and for old vessels.
           The evaluation methods based on comparable sales approach correctly enough reflect the character of the vessel value change depending on age. At the same time, the values determined based on comparable sales approach are characterized by significant spread at various values of vessel years, and, therefore, the use of the comparable sales approach for a vessel generally (not element wise) can be insufficiently exact, especially for new and for old vessels.
           As conclusions on the critical analysis of the possibilities of the application of the standard approaches for an estimation of marine commercial vessels it is necessary to notice, that the cost approach is more correct for new vessels, the income approach for not new, and the comparable sales approach for vessels of the middle age, mainly presented at the second hand market. The same substantially refers to other assets of the marine companies if value essentially depends on the asset age.

Test questions

1. Reasons of a polysemy of vessel value estimations from the points of view of various approaches.
            2. Generalization of commercial vessel evaluation results by independent approaches (weighing of values).
            3. Sphere of the cost approach application for vessel evaluation.
            4. Advantages and disadvantages of the income approach.
            5. Analysis of the comparable sales approach applicability.
            6. Spheres of preference of standard approaches for vessel evaluation.


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