The definitions of appraisal approaches and some of the frequently used methods under these approaches are presented below.The definitions are taken from International Appraisal Standards. The detailed instructions can be reached from relevant standard.
1.MARKET APPROACH
The market approach provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available.
Under this approach the first step is to consider the prices for transactions of identical or similar assets that have occurred recently in the market. If few recent transactions have occurred, it may also be appropriate to consider the prices of identical or similar assets that are listed or offered for sale provided the relevance of this information is clearly established and critically analysed. It may be necessary to adjust the price information from other transactions to reflect any differences in the terms of the actual transaction and the basis of value and any assumptions to be adopted in the valuation being undertaken. There may also be differences in the legal, economic or physical characteristics of the assets in other transactions and the asset being valued.
2.INCOME APPROACH
The income approach provides an indication of value by converting future cash flows to a single current capital value.
This approach considers the income that an asset will generate over its useful life and indicates value through a capitalization process. Capitalization involves the conversion of income into a capital sum through the application of an appropriate discount rate. The income stream may be derived under a contract or contracts, or be non-contractual, e.g. the anticipated profit generated from either the use of or holding of the asset.
Methods Are;
Income capitalization, where an all-risks or overall capitalization rate is applied to a representative single period income, discounted cash flow where a discount rate is applied to a series of cash flows for future periods to discount them to a present value.
3.COST APPROACH
The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction.