Derived Investment Value (DIV)

What Is Derived Investment Value (DIV)?

Derived investment value (DIV) is a valuation methodology used to compute the current value of future cash flows of liquidated assets, minus expenses associated with the liquidation interaction. Derived investment value is like the discount cash flow methodology.

The significance of expenses tied to the liquidation cycle will change widely by various asset types. For a marketable portfolio of common equities, the costs might be insignificant, while the sale of a specialized asset, for example, a games arena, will carry huge marketing, legal, and administration costs.

Understanding Derived Investment Value (DIV)

During the 1980s and mid 1990s, a large number of U.S. banks failed. Liquidating their assets turned into the responsibility of the Federal Deposit Insurance Corporation (FDIC). It made the Resolution Trust Corporation (RTC) to handle a portion of these tasks.

To formulate disposition strategies, the RTC originally needed to think of a method for esteeming the portfolios of nonperforming assets that it was in charge of. These portfolios were divided between private-area contractors who were charged with recuperating however much of the value of the portfolios as could be expected, and contractors who frequently received a higher fee compensation as the percentage of portfolio value really recuperated went past certain limits.

How Derived Investment Value (DIV) Works

Computing derived investment value (DIV) was unique and more complex than working out the value of the underlying assets being liquidated. Factors that the derived investment value needed to consider incorporated the various procedures different states had for mortgage foreclosures, as well as the amount of time a mortgage foreclosure was expected to take.

Valuation analysts needed to estimate the amount of time it would take to recuperate collateral from bankruptcy procedures, the amount of time it would take to sell the asset, as well as expenses associated with dealing with the actual cycle.

These suppositions were normalized yet brought about risks since valuation analysts needed to settle on subjective decisions.

Special Considerations

By and large, the collections the RTC had the option to accomplish surpassed the DIV, albeit this differed by the type of equity partnership that was being utilized to liquidate the assets. Undeveloped and somewhat developed land had the most minimal ratio of NPV of net collections relative to DIV, with commercial and multi-family nonperforming loans having the highest ratio.

Features

• Regulators at the time required a method for figuring out the non-performing assets and decide key factors, for example, what their value was, what could be rescued, and what the time and expense may be for selling the asset.
• The DIV methodology was developed during the 1980s and mid 1990s when a number of U.S. banks imploded.
• Derived Investment Value (DIV) is utilized to ascertain the current value of liquidated assets while likewise accounting for the costs of the liquidation.