Value sometimes expresses the inherent usefulness of an object and sometimes the power of purchasing other goods with it. The first is called value in use, the latter value in exchange. Value in use is the utility of an object in satisfying, directly or indirectly, the needs or desires of human beings. Value in exchange is the amount of commodities, commonly represented by money, for which a thing can be exchanged in an open market. This concept is usually referred to as market value.
Value in use may be defined as the intrinsic capacity of property to satisfy wants. Intrinsic value is a measure of an object’s inherent utility or satisfaction in use. However, the intrinsic capacity is entirely related to those wants or needs which often differ from person to person. For example, in the case of a house, one investor may desire it because of its location, another investor may give serious consideration to the accommodation such property offers, while yet another investor may view it from the property’s flexibility to adapt to other uses. The only way in which these highly personal preferences can be given an objective assessment, is by an averaging the varying individual judgments, such as may happen in the market, where they are translated into exchange values.
Value in use is the utility of an object in satisfying, directly or indirectly, the needs or desires of human beings (Law Encyclopaedia, 1998). This simply means that the object or asset is in place and operating as intended and being the reason of its acquisition in the first place. Value-in-use therefore represents value to the owner and this will largely depend on the utility derivable from such object. Putting it more succinctly, value-in-use can be defined as the net present value of a cash flow that an object generates for a specific owner under a specific use. This in essence means that value-in-use consideration is an individual thing since it is based on the value to one particular user and this may be above or below the market value of the object under consideration.
According to Wyton (1989), the application of value in use premise is generally appropriate when:
- The property is fulfilling an economic demand for the service it provides or which it houses.
- The property has a significant remaining useful life expectancy.
- There is responsible ownership and competent management.
- Diversion of the property to an alternate use would not be economically feasible or legally permitted.
- Continuation of existing use by present or similar users is practical.
- Due consideration is given to the property’s functional utility for it present use.
Wyton (op cit) asserted that the fulfilment of all the outlined criteria is crucial otherwise the foundational basis breaks down and this will have the effect of making the subject falls into a standard use category and should only be valued as value in exchange.
Reference
Wyton, B. R. (1989). Practical application of value in use. The Canadian Appraiser/Winter, 1989.
