discounted cash flow - problems

david hornby

There appears to me to be a number of problems in the valuation profession and these spring from what appears to be, an increasing divergence between valuation theory and the legal system. This leaves the practising valuer in a quandary. How can he/she use the new methods and techniques if they are not recognised by the law? After all the courts are the final arbiters of value and the expense of professional indemnity insurance is adeqaute testimony to this.

Educators and the many non valuers promoting new methods of valuation tend to blame the courts fo being too slow and/or conservative when it comes to new methods and even the profession generally, for not wholeheartedly grasping and embracing the new methods. Such a view is naive, ignoring the realities of real world of litigation and threatened litigation against valuers. It is interesting to note that NSW is considering statutory limitation on the amount of damages claimable against professionals.

The "new" methods most often mentioned are DCF and MRA. MRA has not really got off first base as a practising valuation method except in the fevered minds of a number of academics and is not considered here. Of greater concern is the gushing endorsement of DCF from a number of quarters (usually from non valuers) as a panacea for valuers culminating in a position paper of the Institute which although recognising some of its shortcomings, is still unsatisfactory as a number of important and inherent shortcomings are ignored altogether and other major hurdles such as the non recognition by courts is glossed over.

However, the legal system is the most important component in the valuation system and can never be dismissed ligthly by the practising valuer. Therefore, I will first look at how the courts have dealt with DCF and this means an analysis of the Albany case.

See albany case


The courts have over a long period emphasized the use of comparable sales as the true test of market value. The law in this case is reasonably well settled although there is still some argument about the use of out of line sales as evidence of value. The case that best illustrates the court's preference for sales evidence even if the sales would appear to be non comparable is the Seatainer's case.

See seatainer case

See market values – comparable sales

See annual rental value