Value in Use Calculator

An expert tool for an accurate example of value in use calculation based on discounted cash flows.

Chart comparing undiscounted Future Cash Flows vs. their Discounted Present Value for each period.

What is an Example of Value in Use Calculation?

Value in Use (VIU) is a measurement specific to an entity that represents the present value of the future cash flows expected to be derived from an asset or a cash-generating unit (CGU). It is a crucial concept in financial accounting, particularly under International Accounting Standard (IAS) 36, for performing impairment tests. An impairment occurs when an asset’s carrying amount on the balance sheet exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use.

A clear example of value in use calculation involves estimating an asset’s cash-generating capabilities over its remaining useful life and discounting those cash flows to their present-day value. This method focuses on the value derived from the asset’s continued use within the business, as opposed to what it could be sold for on the open market. It is an internal, entity-specific valuation.

The Value in Use Formula and Explanation

The core of the value in use calculation is the discounted cash flow (DCF) model. The formula is as follows:

VIU = Σ [ CFt / (1 + r)^t ]

This formula sums the present value of each future cash flow. Our calculator provides a practical example of value in use calculation using this exact formula.

Description of variables in the Value in Use formula.

Variable	Meaning	Unit	Typical Range
VIU	Value in Use	Currency (e.g., $)	Varies
CFt	Cash Flow in Period ‘t’	Currency (e.g., $)	Positive or negative values
r	Discount Rate	Percentage (%)	5% – 15%
t	Time Period	Years or other periods	1 to n

The discount rate (r) is a critical input. It must be a pre-tax rate that reflects current market assessments of the time value of money and the specific risks associated with the asset for which the cash flow estimates have not been adjusted. For more on financial modeling, see our WACC Calculator.

Practical Examples

Example 1: Manufacturing Machinery

A company owns a piece of machinery with a remaining useful life of 5 years. Management has projected the net cash inflows the machine will generate for the next five years. They determine a pre-tax discount rate of 10% is appropriate.

• Inputs:
  • Future Cash Flows: $30,000, $28,000, $25,000, $20,000, $15,000
  • Discount Rate: 10%
• Results:
  • Year 1 PV: $27,273
  • Year 2 PV: $23,140
  • Year 3 PV: $18,783
  • Year 4 PV: $13,660
  • Year 5 PV: $9,314
  • Total Value in Use: $92,170

If the machinery’s carrying value on the books is $100,000, an impairment loss of $7,830 ($100,000 – $92,170) would be recognized.

Example 2: Cash-Generating Unit (CGU)

A company is assessing a small subsidiary that operates as a single cash-generating unit. The cash flow projections are more volatile due to market competition.

• Inputs:
  • Future Cash Flows: $100,000, $120,000, $80,000
  • Discount Rate: 12%
• Results:
  • Year 1 PV: $89,286
  • Year 2 PV: $95,663
  • Year 3 PV: $56,942
  • Total Value in Use: $241,891

This example of value in use calculation demonstrates how future projections directly impact the current valuation. For deeper financial analysis, consider our NPV Calculator.

How to Use This Value in Use Calculator

Follow these steps for an accurate calculation:

1. Select Currency: Choose the appropriate currency for your calculation from the dropdown menu.
2. Enter Future Cash Flows: In the text area, input the projected net cash flows for each future period, separated by commas. The calculator assumes each value represents one period (typically a year).
3. Set the Discount Rate: Input the pre-tax discount rate as a percentage. This rate is crucial for a correct example of value in use calculation.
4. Calculate: Click the “Calculate” button to see the results.
5. Interpret Results: The calculator will display the total Value in Use, the total undiscounted cash flows, and the total amount of discount applied. A detailed table and a visual chart will break down the present value for each period.

Key Factors That Affect Value in Use

Several factors can significantly influence the VIU calculation:

• Cash Flow Projections: The accuracy of your future cash flow forecasts is the most critical factor. Overly optimistic or pessimistic projections will skew the result.
• Discount Rate: A higher discount rate leads to a lower VIU, as future cash flows are considered more risky or less valuable in today’s terms. The choice of discount rate is a significant judgment.
• Asset’s Useful Life: The number of periods over which you project cash flows (the asset’s remaining useful life) directly impacts the total VIU.
• Economic Conditions: Broader economic trends, inflation, and market stability can affect both cash flow projections and the appropriate discount rate.
• Technological Changes: The risk of obsolescence can shorten an asset’s useful life or reduce its future cash-generating ability, impacting the VIU calculation.
• Restructuring and Enhancements: Per IAS 36, cash flow projections should reflect the asset in its current condition. Future restructuring or capital expenditure to improve the asset should not be included until the entity is committed to them. A tool like our Payback Period Calculator can help evaluate such investments.

FAQ

1. What is the difference between Value in Use and Fair Value?

Value in Use is an entity-specific measure based on how the company intends to use the asset. Fair Value is a market-based measurement, representing the price that would be received to sell an asset in an orderly transaction between market participants. Recoverable amount is the higher of the two.

2. Why is a pre-tax discount rate used?

IAS 36 requires using a pre-tax discount rate to discount pre-tax cash flows to avoid the complexities and potential double-counting associated with deferred taxes. The goal is to make the VIU calculation consistent and comparable.

3. How do I determine the right discount rate?

The discount rate should reflect the time value of money and the risks specific to the asset. It can be derived from the rate implicit in market transactions for similar assets or by using the Weighted Average Cost of Capital (WACC) of a similar entity as a starting point. Our Discount Rate Calculator can provide further insight.

4. What is a Cash-Generating Unit (CGU)?

A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Often, it’s impossible to determine the VIU for a single asset, so the test is performed on its CGU.

5. Can Value in Use be negative?

Yes. If an asset or CGU is projected to generate net cash outflows (losses) over its remaining life, the Value in Use will be negative. In this case, the recoverable amount would likely be its fair value less costs of disposal (i.e., its scrap or sale value).

6. How often should an example of value in use calculation be performed?

An entity must assess at the end of each reporting period whether there is any indication that an asset may be impaired. If such an indication exists, the entity must estimate the asset’s recoverable amount. For goodwill and intangible assets with indefinite useful lives, an impairment test must be performed annually, regardless of indicators.

7. What are “terminal value” cash flows?

For assets with long or indefinite lives, it’s not practical to project cash flows forever. A “terminal value” is often calculated, which represents the present value of all cash flows beyond the detailed projection period (e.g., beyond year 5 or 10). This calculator focuses on a finite projection period for simplicity.

8. Does this calculator work for any asset?

Yes, this calculator provides a framework applicable to any asset or CGU where future cash flows can be reasonably estimated. The key is the quality of your inputs (cash flow projections and discount rate) to get a meaningful example of value in use calculation.

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