Explain why the replacement cost approach is rarely used to value an entire business.

Expert Solution

Replacement cost method is not used for valuation purpose for the entire company because replacement Cost advocates that all such assets or part of companies or departments which are to be disposed of or replaced by the company are to be valued at the replacement cost so only a part or a certain department of a company can be valued through replacement Cost . Valuation of entire business through replacement cost is not an adequate idea because entire business is not going out of existence and hence it is not used for valuation of the entire business.

Replacement cost method is a method for valuation which will advocate that those assets which are to be disposed off or which are to be replaced by the company are to be valued at replacement Cost and these valuation will be helpful in order to value a particular department of asset whereas these valuation methods cannot be applicable for the whole business because the whole business will be staying in the existence and when the whole business will be staying in the existence, it will not be easy to value them at the replacement cost because they are not going out of the existence, hence it is not prudent to to adopt replacement Cost in order to value the entire business because it would be a highly mis- representative valuation technique.

jeff jeffy answered 2 years ago

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