The other day I was talking to a small bu-siness entrepreneur friend of mine. He was running a van for hire to deliver raw material from the source to a factory about 20 kilometres away. His vehicle was reasonably new but he had an old driver with a defective vision who was working for half the salary of a regular driver. He could do only four trips a day going 80 km to and fro. My friend’s income was not adequate for his survival and for his son’s college education. He could not even maintain his vehicle properly and it was frequently breaking down. He said he wanted to sell off his vehicle and pay his son’s college entrance fees and maintain his family by selling his wife’s jewels.
I asked him how he would value his vehicle and fix a price. He said he would take the earnings from the vehicle for the next few years, back out the cost of running it and calculate the net present value (NPV) by discounting each year’s earnings at around 10 per cent. He said he was adopting this method as the disinvestment of PSUs is also done this way by fixing the reserve price on the basis of NPV.
I pondered for a while and found there was some flaw in this method of valuation. I spoke to my friend the next day and made a suggestion. Give your driver a month’s leave and hire a competent driver and pay him the going rate and ask him to do eight trips a day doing 160 km to and fro and also get your engine tuned for better petrol consumption.