Residual Valuation Research Articles

Stacked Generalization with Sequential-Model Based Optimization for estimating Used Car Valuation in Indonesia

In Indonesia, the purchase and sale of used vehicles is a common practice. The valuation of a used vehicle is influenced by several factors, making it challenging to determine an appropriate selling price. To address this issue, this study employs a stacked generalization (stacking) algorithm to integrate Machine Learning (ML) techniques that have demonstrated efficacy in prior research on used car valuations. The Sequential Model-Based Optimization (SMBO) algorithm is employed to achieve high accuracy while ensuring an efficient hyperparameter optimization process. The initial price of a vehicle is undoubtedly a significant determinant of its resale value. However, this fact is frequently overlooked in previous studies on developing car price estimation models. This study makes a contribution to the field by addressing this issue. The use of the initial price as an input for the model enables two distinct types of analysis: one for the assessment of used car prices and the other for the measurement of the degree of residual valuation of used cars in relation to their initial costs. The results demonstrated that the optimized stacking model exhibited superior predictive ability compared to the other algorithms in both analyses. Feature analysis substantiated the considerable influence of the initial price on the used car's price. This study also corroborates the assertion that accurately predicting the valuation of a used car cannot be achieved by solely considering the usage of the previous owner, such as the car's age and mileage. It is crucial to take into account the car's original attributes, particularly its initial price.

Financial viability decision rules in residual valuation method of property development appraisal: case study of London, England

Purpose An appraisal is normally conducted to determine financial viability of property development projects for several purposes. The residual valuation method is normally used to appraise such projects and the purpose of the paper is to examine its financial viability decision rules (FVDRs) used by practitioners. Design/methodology/approach The qualitative research approach was adopted based on the case study strategy of enquiry where 48 development appraisal reports from 37 Royal Institution of Chartered Surveyors registered firms in London were accessed from the internet and critically reviewed. Findings Site-specific and area-wide development appraisals for planning purposes dominated the reports. Five FVDRs were identified. A development project is financially viable if: (i) computed residual profit expressed as a percentage return is equal to or greater than a determined market benchmark risk-adjusted return; (ii) computed residual profit expressed as a percentage return is positive; (iii) calculated residual land value is greater than open market land value or benchmark land value; (iv) computed residual land value is positive; and (v) there is a surplus when appraisal cost variables including land costs plus allowance for developer’s profit are deducted from gross development value. In some reports, it was discovered some appraisal cost variables were excluded whilst others were inappropriately treated. Practical implications The first and third FVDRs are reasonable whilst the remaining are fraught with problems and using them can make development projects that are financially unviable to be viable. Also, excluding relevant cost variables and treating some inappropriately understate the appraisal cost component resulting in incorrect financial viability outcomes. These can lead to wrong recommendations about financial viability being proffered that negatively affect the practitioners’ clientele. The dominance of development appraisals for planning purposes shows the important role development appraisals continue to play in the English planning system. Originality/value To the best of the author’s knowledge, it is the first time FVDRs in development appraisals have been systematically investigated in England with resultant new empirical findings and arguments.

A politically less contested and financially more calculable urban future: Density techniques and heightened land commodification in Taiwan

This article examines and makes explicit the co-constitutive relationship between density techniques, their depoliticization effects, and heightened land commodification in Taiwan's acceleration to a real estate–oriented economy. TDR (transfer of development rights) and density bonusing are two almost omnipresent practices in urban land development in Taiwan. We ask how their technocratic approach—using predetermined formulas to bracket density use while almost entirely foreclosing community negotiation—has played a formative role in accelerating land commodification. Using mixed research methods, the case study of Central North in New Taipei City helps lay bare how formulaic density rules enable planners to embed their epistemic assumptions about what constitutes a good city within intensified property development. Mimicking the calculative practices performed by the real estate sector, we use residual valuation methods to estimate the maximum price-lifting effects of 18 real estate development projects. We show that formulaic rules allow density to enter cost–benefit analysis spreadsheets as a profit booster in advance of actual granting of extra density, emboldening aggressive land brokering, buying, and selling, which churn up land prices. We argue that the technical depoliticization generated by TDR and density bonusing has become the most effective catalyst in creating a politically less contested and financially more calculable urban world in which capital's acquisitive appetite for land's monetary value is intensified. We conclude by discussing the implications for how to move density from a domain of technical rules and real estate finance to a politics of land.

Quality, GIS mapping and economic valuation of groundwater along river Ravi, Lahore, Pakistan

The demand for water escalated over the years and led to water shortage in many parts of the world. This situation further intensified due to water pollution. This research involves the analysis of groundwater from selected locations along River Ravi, the estimation of economic value of water for intended uses and mapping of threat zones regarding poor quality groundwater consumed by the people or the residents of the selected areas. Questionnaire survey was used as a tool for economic valuation and laboratory analysis was performed for quality testing. The quality of water was found to be average in terms of chemical and bacteriological parameters. Whereas physical parameters were found within acceptable limits. Total dissolved solids (TDS), Turbidity and Electrical conductivity (EC) results were found to be within the permissible limits given by World Health Organization (WHO). However, pH of the water samples of few areas violated the permissible limit of WHO (6.5–8.5). Among chemical parameters, nickle (0.07 mg/l) chromium (1.0 mg/l), cobalt (0.02 mg/l) and arsenic (10 ppb) exceeded their respective permissible limit. Contingent valuation method (CVM) was used for determining Willingness to pay (WTP) for drinking water quality which was found to be low (Rs. 3.848). This was due to the low-literacy level as residents were not aware of the consequences of the contaminated water. The economic value of water for irrigation purpose determined through Residual valuation method (RVM), was found to be 37.46 Wheat > 28.41 Sugarcane > 23.05 Rice. This implicates that wheat has the highest ratio for productivity and residual value as compared to rice and sugarcane. Farmers should be encouraged to grow more of wheat crops as compared to sugarcane and rice. Threat areas for deteriorated water quality were mapped for better understanding of general public regarding drinking water quality in their vicinity.

Performance metrics and required returns for UK real estate development schemes

ABSTRACTReal estate development has received less scrutiny than real estate investment in terms of appraisal practices and performance measurement. This is despite the inherent uncertainty and financial risks associated with development as an activity. We investigate market practices regarding performance metrics and return expectations both for residential and commercial real estate development in the UK, exploring what is considered as an appropriate return and how this varies according to type and duration of scheme, and method of appraisal used. After examining the literature and the information available on ex-post returns from development activity, results from a survey of real estate developers are reported, supplemented by findings from interviews. The results suggest that the use of traditional residual valuation techniques dominates discounted cash flow models when appraising development projects, particularly among residential developers, while profit-on-cost and profit-on-value are the most popular metrics for quantifying required returns. Unlike NPV or IRR, these metrics do not account for the timing of cash flows, raising questions about the robustness of appraisals in this sector. Such metrics might suffice if required profits are adjusted in ways that are consistent with scheme duration and risks, but it is unclear that this is currently the case.

Residual Valuation of Land Parcel at Airoli

In the absence of comparable sales, the development approach to valuation (also known as residual valuation) is considered an acceptable method to determine the value of land. The method involves considering the value after the completion of the development, then by deducting the cost of such a development, the remaining amount (residual amount) is the amount that a developer would be prepared to pay for such a property in order to obtain the development potential (Boshoff, 2011). Currently, Airoli real estate market is saturated and recently there has not been any transaction related to land parcels, so to derive at a land value application of residual valuation approach is appropriate as it take into consideration current real estate market trends, which directly rely on the proposed mix of development conceptualized by developer.

Performing calculative practices: residual valuation, the residential development process and affordable housing

This article examines the ways in which post-social and relational theories have the potential to add to our understanding of housing issues. Drawing on the work of the sociologist Michel Callon and the geographer Susan Smith, it examines the ways in which housing markets are made. In particular, focusing on calculative practices it examines how the performative nature of residual valuation calculations has profound implications for the operation of housing markets and ultimately challenges the capacity of the development sector to produce affordable housing. In addition, using the example of planning practice in England, it examines the ways in which potentially transgressive adaptations of ‘locked-in’ calculative practices are resisted. It is argued that a research focus on calculative practices challenges ‘externalized’ understandings of housing markets and has the potential to render the performative nature of calculations visible.

Explaining variation in the economic value of irrigation water using psychological capital: a case study from Ndumo B and Makhathini, KwaZulu-Natal, South Africa

This study investigates the economic value of irrigation water using data collected from 200 smallholder producers in Makhathini and Ndumo areas, KwaZulu-Natal.The study accounts for psychological capital (individual mind-set and attitude affecting motivation to take initiatives) as an important aspect of farm management. This concept focuses more on the ‘soft’ aspects of farm management, which have not been adequately studied in the context of smallholder farming. A sustainable livelihoods framework is employed as a conceptual framework and the role of psychological capital is integrated to explain the variation in water values. The study employs the residual valuation method to estimate water values, principal component analysis to generate an index for psychological capital, and the general linear model to explain variation in water values. The findings suggest that variation in water values was mainly influenced by the location of the farmer, farmer type, physical capital, social capital, land size, farming experience, crop type and psychological capital. The results reinforce the importance of institutional arrangements and collective bargaining as an important element of managing a smallholder farm to increase the economic value of water. To build and develop positive psychological capital for smallholders, it is recommended that government should re-visit the usual model of ‘hand-outs’ (input, finance). It is time to re-consider direct farmer support that entails being heavily involved in their day-to-day activities (i.e., purchasing inputs and running the irrigation schemes on their behalf). Going forward, the focus should rather be on enabling them to change their behaviour to be self-reliant and own their own destiny through on-farm and off-farm economic activities. Moreover, government and other development partners have to understand the long-term behavioural impact (on farmers) of what they do, for instance, entrenching expectations.

Public decision making for heritage conservation: A Hong Kong empirical study

This study aims to investigate the objective factors that determine heritage conservation decision makings. A probit regression model, fed with land value data obtained by the residual valuation method, was used to evaluate data sets for 155 built heritage sites designated as statutory monuments or administratively graded by the Antiquities and Monument Office in Hong Kong. Five refutable hypotheses were tested. Although a building at a larger site has a higher chance to be designated a graded heritage building than one at a smaller site, the chances of it being designated a grade heritage building were statistically higher for an older building than for a newer one; not lower for sites under zoning for non-private uses and lower for a privately owned building than a government building; and above all higher for a site with higher property value. The results as a whole dispute the presumption of other researchers, who argued that planning decisions in general, or conservation planning decisions in particular, were dominated by a pro-market sentiment in favor of economic benefits. They form a discussion on the relevance of statistical inquiry for heritage conservation.

Environmental Price of Game Animal Stocks

ABSTRACTResearch has addressed the valuation of hunting and game species according to their extractive value, using both market and non-market methodologies. This study provides a new perspective to estimate environmental prices of game animals based on game hunting leases, population dynamics, the assumption of a steady state, and the use of the residual valuation method. This, in turn, allows the calculation of the contribution of game animal stock to total income from hunting and the value of game animal stock by species, sex, and age. These values are estimated in a manner that is consistent with the exchange value of national accounts, allowing improvement of game species valuation in ecosystem accounting.

Do combining value estimates increase valuation accuracy? Evidence from Indian chemical industry

Purpose – Being a developing nation with huge opportunity of growth prospects the assessment of valuation models becomes important to have a more realistic value estimate. The purpose of this paper is to empirically examine the comparative accuracy and explanatory performance of discounted cash flow (DCF) and residual income model (RIM) valuation models for the Indian chemical industry and come up with a composite valuation model. Design/methodology/approach – To achieve the objective of the study the authors first determine the intrinsic values using both the models. Comparisons of the models are based on prediction errors and the explanatory performance of market value on value estimates. The study uses panel regression to forecast estimates of earnings and measure explanatory performance. The authors examine the ability of the value estimates to explain cross-sectional variation in the observed market values. The study also uses GMM method for deriving robust estimators. Variables for the study are collected from the CMIE’s prowess data base (release 4). The authors consider all 1,075 BSE listed chemical companies for the purpose of the study. The study uses annual data points starting from 31 March 2002 to 31 March 2011. Findings – The comparative framework shows that both Residual Income model and Composite Valuation model are superior to Discounted cash flow model and are equally likely. But since composite value estimates considers all bonafide informations of individual models, the estimates of Composite Valuation model becomes more reliable. Research limitations/implications – The study only compares and combines the two most widely used valuation models around the world. Future studies can be conducted using the third widely used valuation models, i.e. multiples and see the level of accuracy of individuals as well as the composite model. Originality/value – As a concern very few research has been conducted in this area in India. This paper provides practitioners with a snapshot of the applicability of DCF and RIM valuation models. And also shows how a composite value estimate can improve accuracy.

Shadow price of water for irrigation—A case of the High Plains

The 2011 and 2012 droughts considerably affected the Ogallala Aquifer supplying irrigation water for agricultural production in the US High Plains (HP). Shrinking water resources and growing demand for water create a challenging tradeoff situation. This also poses a question about the value of water and efficient water allocation. Currently, water rates for irrigating crops paid by farmers do not reflect the actual value of water that can be expressed solely as a shadow price. Also studies are missing that would comprehensively compare different states and different crops in one methodological framework. This paper helps to fill this gap. Farm-budget residual valuation is applied to estimate the shadow price of water for irrigation in three High Plains states: Texas, Kansas and Nebraska, for five prevailing crops: corn, cotton, sorghum, soybean, and wheat.Among the analyzed High Plains states the highest shadow price of water was found for wheat production in the Texas Northern High Plains ($865.99/af=$0.70/m3), while the lowest shadow price was found for corn in the Texas Southern High Plains ($5.13/af=$0.004/m3). The study can be helpful to stakeholders and policy makers to evaluate scenarios and tradeoffs between profitable crop production and conservation of water resources.

A Study on Relevance of Net Financial Costs on Valuation of Equity

This study investigates the relevance of net financial expenses with respect to equity valuation. According to the residual earnings valuation model, income related to balance sheet items that are recorded at fair value is not applicable for valuation purposes. In this study, according to empirical findings and use of fair value accounting, two hypotheses formulated to investigate if there is a significance relevance between the financial expenses, equity valuation, and market prices of stocks that. The statistical samples are accepted companies in stock exchange from 1384 to 1391. 180 companies are chosen with systematic and purposeful omits. To test the hypothesis sizes and analyzing the data Correlation and multivariate regressions tests, SPSS, Kadal and Rah Avard Novin are used. Conclusion suggests that financial expenses and equity valuation influence the shareholders reactions on company’s stock returns. In accordance with the contention that under IFRS, aggregate net financial liabilities are recorded at a book value that is close to fair value. Keywords: Net financial expenses, Residual earnings, Operating income, Equity valuation, Fair value accounting.

Product Line Design with Seller-Induced Learning

In practice, some well-established service providers (sellers) offer one-time experiences or product demonstrations for the services that have been introduced to the market for years. Such activities, labeled as seller-induced learning, not only help the consumers learn more about themselves but also exploit the consumers by elaborating on the consumer heterogeneity. When the seller-induced learning completely resolves the consumers' valuation uncertainty, it can facilitate a more sophisticated price discrimination scheme and may give rise to a relatively more efficient allocation. Nevertheless, if there is residual valuation uncertainty, the seller may abandon the seller-induced learning to avoid the exacerbated ex post cannibalization. We show that an exploding offer shall sometimes be offered in conjunction with the seller-induced learning to encourage immediate purchases when uncertainty arises in only some consumers. We identify regimes under which the seller-induced learning is charged at a strictly positive price. Under these regimes, the seller need not sacrifice the ex post efficiency upon inducing consumer learning. Therefore, our result indicates that the seller-induced learning may eliminate the conflict between rent extraction and efficiency initiatives. However, quality distortion prevails when the seller provides an identical menu for all the consumers or the free seller-induced learning. This paper was accepted by J. Miguel Villas-Boas, marketing.

Using the Equity Residual Approach to Valuation: An Example (Abridged)

This note provides an example of the equity residual valuation method to a company. The note can be used to accompany cases on private equity acquisitions or other levered transactions. It provides a simple fact set to focus on the essentials of the method.

Water productivity in smallholder irrigation schemes in South Africa

This study investigates the productivity and value of water in two smallholder irrigation schemes (Zanyokwe and Thabina) in South Africa. We apply the residual valuation method (RVM), willingness to pay (WTP) and cost-based approaches (CBA) (i.e. accounting costs of operation and maintenance) to evaluate water productivity and values per crop, per farm, and by scheme. In both schemes, water value estimated by the RVM for vegetables (cabbage, tomatoes and butternuts) is greater than water value for dry maize. At the farm and scheme levels, a comparison was made between gross margin per m 3 of water, WTP per m 3 and accounting cost per m 3 to estimate the relative value of water productivity. The active farmers in the Zanyokwe scheme have lower WTP per m 3 (R0.03) than the gross margin of output (R0.69). Also, the accounting cost (R0.084) per m 3 of water is less than the gross margin. In the Thabina scheme, active farmers are willing to pay (R0.19) per m 3 of water. Hence farmers in Thabina are ready to pay as much as three times the proposed costs of O&M (R0.062) per m 3 of water used. Both the accounting cost and willingness to pay are less than the gross margin per m 3 of water in the Zanyokwe scheme. Our findings indicate that extension and training may be required to improve the productive use of water for those farmers whose returns are insufficient to cover the cost of supply.

Using the Equity Residual Approach to Valuation: An Example

This note provides a detailed explanation of how to apply the equity residual valuation method when the debt/equity mix is changing. An example is provided that works through levering betas. The note can be used to accompany cases on leveraged buyouts.

Residual Income Valuation: Are Inflation Adjustments Necessary?

Residual income-based valuation is conventionally carried out using forecasts of residual incomes that are derived from historical cost accounting numbers and discounted at the nominal cost of equity. A recent study by Ritter and Warr (2002) argues that this practice can lead to undervaluation of firms, and recommends that residual income-based valuation should instead be carried out using inflation-adjusted residual income forecasts discounted at the real cost of equity. Ritter and Warr (2002) go on to propose what they claim is a 'theoretically correct residual income model' that adjusts for inflation-induced distortions. The present paper separately identifies the three types of inflation adjustment contained within the Ritter-Warr model, and shows that none of these adjustments has any effect on the theoretical value estimate obtained from the residual income-based valuation procedure. It finds no theoretical basis for the argument that residual income valuation needs to be carried out on the basis of inflation-adjusted residual incomes.

An Empirical Analysis of the Effect of Changes in Interest Rates on Accounting Rates of Return, Growth, and Equity Values

This paper examines whether the documented negative correlation between changes in interest rates and stock returns is also observed in the fundamentals on which equity values are based. The negative correlation is often attributed to changes in the discount rate, a denominator effect in a valuation model. However, there may also be a numerator effect on the expected payoffs that are discounted, and it is this effect that the paper examines. The paper documents the effect of changes in interest rates on accounting profitability and asset growth that are tied to expected dividends and value in the residual earnings valuation model. The effects of changes in both real and nominal interest rates are investigated so that the effects of changes in expected inflation (that has been the focus of much of the research on interest rates and stock returns) are isolated. Accordingly, the paper evaluates the Modigliani and Cohn conjecture that investors do not understand the effect of changes in expected inflation on firms. The results show that both real and nominal rates are positively related to subsequent profitability and growth, at least in the near term. So, increases in interest rates are followed by higher profitability and growth. However, the resultant increase in earnings is typically not large enough to cover the increase in the required return from the increase in the interest rate. So the overall effect on equity value is negative, consistent with the results of the research on interest rates and stock returns.

Residual Income and Value-Creation: The Missing Link

This paper extends the residual income-based valuation framework to encompass an articulation between (i) value created for a firm's shareholders beyond the cost of their invested capital (excess value created) during a multi-period interval and (ii) a matching cumulation of the firm's residual incomes. We show that, absent an initial difference between economic value and book value of shareholders' funds, excess value created comprises (i) the end-of-interval terminal value of all residual incomes accruing during the interval plus (ii) the present value at the end of the interval of all residual incomes expected to accrue subsequently.