Value in Use Calculator

Determine the entity-specific value of an asset by calculating the present value of its future cash flows. Our tool simplifies the complex **value in use** calculation.

Formula Used: Value in Use = [ Σ (CFt / (1+r)^t) ] + [ (Terminal Value / (1+r)^n) ]. It is the sum of the present values of cash flows during the forecast period and the present value of the terminal value.

Cash Flow Projection Details

Year	Projected Cash Flow	Discount Factor	Present Value

Table showing the year-by-year discounted cash flow analysis.

Cash Flow vs. Present Value Chart

Chart comparing the nominal projected cash flows to their present value over the forecast period.

What is Value in Use?

Value in use (VIU) is a measurement, defined under International Financial Reporting Standards (IFRS), representing the net present value (NPV) of cash flows that an asset or cash-generating unit (CGU) is expected to generate through its continuing use and eventual disposal. Unlike market value, which reflects a price agreed upon by willing buyers and sellers, value in use is an entity-specific valuation. It reflects the value a particular company expects to derive from an asset based on its unique operational strategy. This makes the value in use calculation a critical tool for internal decision-making and impairment testing.

Who Should Calculate Value in Use?

Financial analysts, corporate finance teams, and accountants regularly perform a value in use calculation. It is a mandatory step in impairment testing under IAS 36. An impairment loss must be recognized if an asset’s carrying amount on the balance sheet exceeds its recoverable amount (which is the higher of its fair value less costs to sell and its value in use). Beyond compliance, business managers use this metric to evaluate the ongoing economic viability of assets and make informed capital budgeting decisions.

Common Misconceptions

A frequent error is confusing value in use with fair value. Fair value is a market-based measurement, while value in use is based on internal projections and strategy. Another misconception is that it represents an asset’s liquidation value. In reality, it assumes the asset continues to be used within the business, making it a “going concern” valuation, not a “gone concern” one.

Value in Use Formula and Mathematical Explanation

The calculation of value in use is a two-stage discounted cash flow (DCF) model. It involves projecting future cash flows for a specific forecast period, calculating a terminal value for the period beyond that, and then discounting all of these cash flows back to their present value. The core idea is that money today is worth more than the same amount of money in the future.

Step-by-Step Derivation:

1. Forecast Future Cash Flows (FCF): Project the net cash inflows the asset will generate for each year of a defined forecast period (e.g., 5 years).
2. Calculate Terminal Value: Estimate the value of the asset at the end of the forecast period, representing all subsequent cash flows into perpetuity. The Gordon Growth Model is commonly used: Terminal Value = [FCF_n * (1 + g)] / (r - g).
3. Discount All Cash Flows: Discount each year’s projected cash flow, and the terminal value, back to their present value using the discount rate. The formula for present value is: PV = FCF_t / (1 + r)^t.
4. Sum the Present Values: The total value in use is the sum of the present values of all forecast period cash flows plus the present value of the terminal value.

This comprehensive method ensures that the final value in use accurately reflects the time value of money and long-term growth prospects.

Variables Table

Variable	Meaning	Unit	Typical Range
FCF_t	Net cash flow for period ‘t’	Currency (€, $, etc.)	Varies by asset
r	Discount Rate (WACC)	Percentage (%)	5% – 15%
g	Perpetual Growth Rate	Percentage (%)	1% – 3%
t	Time period (year)	Number	1 to n
n	Final year of the forecast period	Number	5 – 10

Practical Examples (Real-World Use Cases)

Example 1: Valuing Manufacturing Machinery

A company owns a specialized manufacturing machine. They need to perform an impairment test. They project the machine will help generate net cash flows of €50,000 next year, with this amount growing at 3% annually for 5 years. After that, they expect a perpetual decline (negative growth) of -1%. Using a discount rate of 10%, the value in use calculation would discount each of the five years of cash flow and the calculated terminal value back to the present day to determine the machine’s economic value to the firm. This result is then compared to its book value.

Example 2: Assessing a Software Platform CGU

A tech company wants to assess the value in use of its enterprise software platform, which it considers a cash-generating unit (CGU). The platform generates €2 million in cash flow. Projections show a high growth rate of 15% for the first three years, slowing to 5% for the next two. The long-term perpetual growth rate is estimated at 2.5%, reflecting the broader economy. With a discount rate of 12% (reflecting the tech industry’s risk), the company can calculate the platform’s value in use to guide strategic investment or potential divestment decisions. For more on this, see our guide on asset valuation.

How to Use This Value in Use Calculator

Our calculator simplifies the value in use calculation process. Follow these steps to get an accurate estimate:

1. Enter Initial Annual Cash Flow: Input the net cash flow you expect the asset to generate in the first year.
2. Set the Annual Growth Rate: Specify the percentage by which you expect cash flows to grow each year during the specific forecast period.
3. Define the Forecast Period: Enter the number of years for your detailed projection (e.g., 5 years).
4. Input the Perpetual Growth Rate (g): This is the stable rate you expect cash flows to grow at forever after the forecast period. It should generally not exceed the long-term economic growth rate. An expert investment analysis is crucial here.
5. Provide the Discount Rate (r): This is your required rate of return, often the company’s Weighted Average Cost of Capital (WACC). For guidance, you can refer to our WACC guide.

The calculator automatically updates the total value in use, intermediate values, the projection table, and the chart in real time. The results help you understand not just the final number, but also the underlying components driving the valuation.

Key Factors That Affect Value in Use Results

The accuracy of a value in use calculation is highly sensitive to its inputs. Understanding these drivers is key to a reliable valuation.

• Cash Flow Projections: This is the most critical input. Overly optimistic or pessimistic forecasts will directly skew the value in use. Projections should be based on historical performance and realistic future expectations.
• Discount Rate (r): A higher discount rate implies higher risk or opportunity cost, which significantly lowers the present value of future cash flows, thus reducing the value in use.
• Perpetual Growth Rate (g): Small changes in this rate can have a large impact on the terminal value, which often constitutes a significant portion of the total value in use.
• Forecast Period Length: A longer explicit forecast period can capture more of an asset’s life cycle but also increases uncertainty. The choice of period should be justifiable.
• Inflation: Both cash flows and the discount rate should be treated consistently (either both nominal or both real). Failing to align them will distort the value in use.
• Capital Expenditures: The calculation should account for future capital expenditures required to maintain the asset’s cash-generating capacity.

A thorough discounted cash flow model relies on careful consideration of each of these factors to arrive at a meaningful value in use.

Frequently Asked Questions (FAQ)

1. What is the difference between value in use and fair value?

Value in use is the present value of future cash flows from an asset’s continued use within a specific company. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. VIU is entity-specific, while fair value is market-specific.

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

IAS 36 technically requires using pre-tax cash flows and a pre-tax discount rate to avoid the complexities of deferred taxes, which are accounted for separately. However, in practice, many analysts use post-tax figures because post-tax discount rates are more readily observable. The key is to be consistent.

3. What happens if the discount rate (r) is lower than the growth rate (g)?

If the discount rate is less than or equal to the perpetual growth rate, the terminal value formula becomes mathematically invalid (division by zero or a negative number), implying infinite value. This is economically unrealistic. The perpetual growth rate must always be lower than the discount rate.

4. How do I choose a realistic perpetual growth rate?

The perpetual growth rate should reflect the long-term, stable growth you expect for the asset’s cash flows. It is typically benchmarked against long-term inflation or GDP growth rates (e.g., 1-3%). A rate higher than the economy’s growth rate is unsustainable in the long run.

5. Can value in use be negative?

Yes. If an asset is projected to generate net cash outflows (i.e., it costs more to operate and maintain than the cash it brings in), its value in use will be negative. This is a strong indicator of impairment and suggests the asset should be considered for disposal.

6. How often should a company calculate value in use?

A company must test for impairment (which involves calculating recoverable amount and therefore potentially value in use) at least annually for goodwill and intangible assets with indefinite useful lives. For other assets, it is required whenever there is an indication of impairment.

7. 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 not possible to calculate a value in use for a single asset, so it must be done for the entire CGU it belongs to.

8. Does this calculator consider taxes?

This calculator uses a simplified model based on the inputs provided. While IAS 36 specifies a pre-tax approach, users should be aware that these inputs can represent either pre-tax or post-tax figures, as long as consistency is maintained with the discount rate. For a deeper analysis, consider using a NPV calculator.