Calculate Value in Use

Expert Financial Valuation and Impairment Testing Tool

What is Calculate Value in Use?

To calculate value in use is to determine the present value of future cash flows expected to be derived from an asset or a cash-generating unit (CGU). In the world of accounting and finance, specifically under IAS 36, “Value in Use” represents the internal value of an asset to the entity, rather than its market value or “fair value less costs of disposal.”

Financial analysts and accountants must calculate value in use when performing impairment tests. If the carrying amount of an asset exceeds its recoverable amount (the higher of value in use and fair value), an impairment loss must be recognized. This ensures that assets are not overvalued on the balance sheet.

Common misconceptions include confusing VIU with Net Present Value (NPV) of a project. While the math is similar, VIU is specifically focused on the continued use and ultimate disposal of an existing asset within a specific business context.

Calculate Value in Use Formula and Mathematical Explanation

The process to calculate value in use involves a Discounted Cash Flow (DCF) model. The formula is expressed as:

VIU = Σ [CF_t / (1 + r)^t] + [Terminal Value / (1 + r)ⁿ]

Where:

Variable	Meaning	Unit	Typical Range
CFt	Cash Flow in Year t	Currency ($)	Based on projections
r	Discount Rate (WACC)	Percentage (%)	7% – 15%
n	Forecast Period	Years	5 – 10 Years
g	Terminal Growth Rate	Percentage (%)	1% – 3%

Practical Examples (Real-World Use Cases)

Example 1: Manufacturing Machinery

A textile company needs to calculate value in use for a specialized weaving machine. The machine is expected to generate $50,000 in cash flow next year, growing at 3% annually for 5 years. Using a discount rate of 10% and a terminal growth of 2%:

• Total Discounted CFs: Approximately $198,000
• Discounted Terminal Value: Approximately $410,000
• Value in Use: $608,000

Example 2: Software Acquisition

An IT firm evaluates a proprietary software module. Year 1 CF is $200,000 with 10% growth over 3 years. WACC is 12%. No terminal value is assigned as the technology becomes obsolete after year 3.

• Year 1 PV: $178,571
• Year 2 PV: $175,382
• Year 3 PV: $172,254
• Value in Use: $526,207

How to Use This Calculate Value in Use Calculator

1. Enter Year 1 Cash Flow: Input the net cash flow expected during the first 12 months.
2. Set Growth Rate: Estimate how much the annual cash flow will grow during the forecast period.
3. Input WACC: Enter your company’s Weighted Average Cost of Capital or hurdle rate.
4. Define Forecast Period: Choose how many years of explicit projections you have (usually 5).
5. Terminal Growth: Define the growth rate for the “perpetuity” period after your forecast ends.
6. Review Results: The tool will automatically calculate value in use and present a detailed breakdown and chart.

Key Factors That Affect Calculate Value in Use Results

When you calculate value in use, several sensitive variables can significantly shift the final figure:

• Discount Rate (WACC): The most sensitive variable. A small increase in the discount rate leads to a significant decrease in the VIU.
• Terminal Growth Rate: Since the terminal value often accounts for 60-80% of total VIU, this rate is critical. It should never exceed the long-term GDP growth rate.
• Cash Flow Reliability: Projections should be based on reasonable and supportable assumptions as per accounting standards.
• Inflation: If cash flows are nominal, the discount rate must also be nominal to ensure consistency.
• Economic Life: The period over which the asset is expected to be economically usable.
• Tax Effects: VIU is typically calculated on a pre-tax basis for IAS 36, though many analysts use post-tax and adjust the discount rate accordingly.

Frequently Asked Questions (FAQ)

1. Why do we calculate value in use instead of just using market value?

Market value reflects what a third party would pay, while calculate value in use reflects the specific synergy and operational value the asset provides to its current owner.

2. What discount rate should I use?

Typically, the Weighted Average Cost of Capital (WACC) of the company or a specific market-participant rate for that asset class is used.

3. Can terminal growth be negative?

Yes, if an asset is expected to decline in productivity or market relevance over the long term, a negative growth rate can be used to calculate value in use.

4. How does IAS 36 define Value in Use?

IAS 36 defines it as the present value of future cash flows expected to be derived from an asset or cash-generating unit.

5. Should I include financing costs in cash flows?

No, cash flows used to calculate value in use should exclude financing activities and tax payments to avoid double-counting with the discount rate.

6. What if the Discount Rate is lower than the Terminal Growth Rate?

The Gordon Growth Model (used for Terminal Value) fails mathematically in this scenario. In practice, terminal growth must always be lower than the discount rate.

7. Is VIU the same as Fair Value?

No. Fair value is an exit price in an orderly transaction between market participants. VIU is entity-specific.

8. How often should I calculate value in use?

Publicly traded companies usually perform this annually for goodwill or whenever there is an “indicator of impairment” for other assets.