Appraisal in finance means to calculate the just price of an asset (or a financial document representing that asset) whose produce profit.
In finance the key word is VALUATION, and its a part of the study of Corporate Finance.
To avoid any misunderstanding, “valuation” means identifying the fair price or intrinsical price of a company, a project or the modification of an existing company.
Examples of modifications are mergins, acquisitions, investments in new projects, launching of new products, entry in new markets, acquisitions of new technologies, changing in the capital structure, outsourcing, reengineering, executive performance, area performance, and acquisitions of new equipments, etc..
Let us take a look at valuation as applied to modification of an existing business.
To evaluate a modification of a company, we will calculate two Expected Intrinsical Prices, which represents the value before the modification and the price after the modification.
We have added “Expected” because to calculate its two prices we need to PROJECT its two Cash Flows, which is the equivalent of the company´s “fire power”, before and after the modification. Therefore, adding the Present Value of these cash flows discounted at a just rate to obtain two Expected Intrinsical Prices and compare for an increase in value.
Calculate these Cash Flows are the tough and most important part of the valuation.
If the value of the company before the modification was $20 millions, the cost value of th modification $2 millions and the value after the modification is $26 millions, therefore, it will be recommended to do it, because 20 + 2 = 22, that is lower than the new value of 26. Also means that the modification increased in $4 millions the company value.
