Exercise on asset valuation: Small Ventures Limited

Small Ventures Ltd owns three non-current assets. For the purposes of the balance sheet on December 31st, the directors have decided to value these assets at their DEPRIVAL VALUES.

Column one shows the net proceeds of sale of the asset and column two shows the cost of an identical replacement (that is, one of the same age and condition) on the same date.

Net Proceeds Replacement

of Sale Cost

Asset A 2,000 15,000

B 11,300 14,500

C 4,200 7,400

Asset A is expected to have a further life of three years at the end of which its scrap value is expected to be 1,000. During each of the three years it is expected to generate cash revenue of 11,000 at an approximate annual operating cost of 5,000.

Asset B has an expected life of four further years and a zero expected scrap value. It is expected to produce an annual cash revenue of 6,000 at an annual operating cost of 2,000.

Asset C is expected to last indefinitely. It produces annual revenue of 3,000 at an annual operating cost of 1,500.

The company has a cost of capital of 20%.

REQUIRED:

a) Explain clearly what you understand by the term 'deprival value'.

b) Compute the deprival value of each asset. Explain briefly your logic and assumptions and show your workings clearly.

Ignore taxation, general inflation and uncertainty.

c) What are the advantages and disadvantages of using either real capital maintenance or physical capital maintenance rather than monetary capital maintenance in financial reporting?