Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.16, 2015 10 The Efficacy of the Use of Depreciated/Replacement Cost Method as an Alternative to Profit/Account Method in Valuation of Hotels in Bauchi Aliyu Ahmad Aliyu 1* Abdullahi Ali Abdu 1 Hamza Usman 1 Dominion Agwela Anosike 2 1.Department of Estate Management and Valuation, Faculty of Environmental Technology, Abubakar Tafawa Balewa University, Bauchi, P.M.B. 0248, Bauchi, Bauchi State, Nigeria 2.Department of Estate Management and Valuation, School of Environmental Studies, The Federal Polytechnic, Bauchi, P.M.B. 0231, Bauchi, Bauchi State, Nigeria E-mail: aaaliyu1978@yahoo.com Abstract Various valuation models were developed to value different interests in land and landed property. Although, the basis of valuation might be the same, the methodology may sometimes differ to capture certain peculiarities and attributes in respect of a particular property. In an ideal situation, the profit method of valuation should be adopted in the valuation of hotel properties. Where this is not attainable, the depreciated replacement cost method is adopted. The aim of the study is to examine the efficiency of the use of depreciated replacement cost method as an alternative to profit or account method in valuation of hotels, Bauchi with a view to suggest and recommend the best method of valuing hotel properties. This research is located in a positivist epistemology, where no objective truth is accepted and truth or meaning generation comes through social engagement with the world. The instruments used for data collection are interviews, house inspection, and document review. The study adopts the depreciated replacement cost method and profit or account method of valuation in analyzing the data obtained. Complete theoretical analysis was equally adopted in analyzing the data. The findings reveal that the cost approach may provide a reliable estimate of value in the case of new hotel properties, but as buildings and other improvements grow older and begin to deteriorate, the resultant loss in value becomes increasingly difficult to quantify accurately. The revealed results confirmed the importance of profit or account method of valuation as the most effective and efficient in the evident that the hotel property is not moving at a lost. The study recommends amongst others that before cost approach could be used in valuation of hotel properties, income-related consideration must be difficult to ascertain. Keywords: Depreciated/Replacement Cost Method, Hotel Valuation, Improvement, Land and Profit/Account Method 1. INTRODUCTION 1.1 Background to the Study Various valuation models were developed to value different interests in land and landed property. Although, the basis of valuation might be the same, the methodology may sometimes differ to capture certain peculiarities and attributes in respect of a particular property (Ifediora, 2009). Traditionally, hotels are valued using profit or account method of valuation. This method is mostly used because hotels exhibit certain characteristics and peculiarities which render the use of other methods impracticable (Ogunba, 2013). Although, hotels generate income, rent is not paid for its usage. This renders the use of investment method alone impracticable. Hotels also embody personal properties such as furniture and fitting in addition to the real property. The application of cost method becomes cumbersome due to the fact that these personal properties are subject to high physical and functional obsolescence. Conventionally, the use of profit or account method of valuation in valuing hotels is justified from managerial or business point of view (Kuye, 2000). It is argued that in any business, there are four distinct players, whom all deserve reward for partaking in the business. In other words, there are four factors of production in any business. Hotel business is, therefore, not an exception. These factors include: land, labour, capital and entrepreneur. These factors are entitled to rent, wage/salaries, interest and profits. Thus, the income of the hotel comprises these four rewards. When expenses, interest, and profits or operator’s remuneration are deducted from the income, the balance represents rents for the hotel property which can be capitalized using an appropriate yield and year’s purchase to obtain the capital value. However, profit method only value the goodwill of the property which, to may, only present value in the use or investment value rather than value in exchange or market value. This value is also criticized from the opportunity cost point of view. A potential purchaser would mostly likely consider the cost he would incur to develop a similar property plus cost of land (Metcalfe, 2014). Also, the potential seller would most likely consider his past expenditure on the property. In other words, he would likely consider the cost of developing the hotel. Thus, he may be reluctant to sell at price lower than the cost he incurred. Thus, cost becomes a unifying brought to you by CORE View metadata, citation and similar papers at core.ac.uk provided by International Institute for Science, Technology and Education (IISTE): E-Journals