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Cost Savings Method Valuation Guide

The document outlines the Cost Savings Method for valuation under IRS Revenue Ruling 59-60, emphasizing its appropriateness due to measurable labor cost reductions. It details key assumptions, a step-by-step calculation of labor savings, and identifies supporting evidence and limitations. The method is deemed conservative and audit-ready, with all necessary documentation provided for IRS replication.

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5 views2 pages

Cost Savings Method Valuation Guide

The document outlines the Cost Savings Method for valuation under IRS Revenue Ruling 59-60, emphasizing its appropriateness due to measurable labor cost reductions. It details key assumptions, a step-by-step calculation of labor savings, and identifies supporting evidence and limitations. The method is deemed conservative and audit-ready, with all necessary documentation provided for IRS replication.

Uploaded by

cesarpublishingcompa1ny
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

■ Valuation Worksheet — Part 3: Cost Approach /

Cost Savings Method (Answer Key)


Prepared pursuant to IRS Revenue Ruling 59-60

Section 1: Purpose and Scope of this Methodology Section


• Explains why the Cost Savings Method is appropriate under Revenue Ruling 59-60 → Because the
Tool reduces measurable, recurring labor costs.
• Defines the key assumptions and supporting evidence → Task logs, wage data, pilot tests, IT
invoices.
• Presents a step-by-step calculation of labor cost savings → Provided in Section 4.
• Identifies conservatism, limitations, and recommended supporting exhibits → Conservative efficiency
assumption (75%), rounding downward, exhibits listed in Section 7.

Section 2: Rationale for Selection of the Cost Savings Method


• Direct causal link: The Tool performs tasks (shelving, tagging, ranking) that otherwise would require
manual labor.
• Quantifiability: Task volume, task time, and labor rates are measurable from logs and BLS data.
• Comparability to manual inputs: Automation replicates BPO-style microtasks, so avoided labor cost is
a valid proxy.
• Absence of reliable market comparables for the trade secret: Market method impractical; income
method speculative.

Section 3: Definition of Key Assumptions (Inputs)


Task Volume (N): 50,000 tasks per year
Time per Task (t): 5 minutes
Labor Rate (w): $25.00/hour
Automation Efficiency (e): 75%
Maintenance (M): $5,000/year

Section 4: Calculation — Step-by-Step


• Step a — H_manual = 50,000 × (5 ÷ 60) = 4,166.67 hours
• Step b — H_saved = 4,166.67 × 0.75 = 3,125 hours
• Step c — Gross = 3,125 × $25 = $78,125
• Step d — Net = $78,125 − $5,000 = $73,125

Section 5: Conservatism, Rounding, and Reporting Convention


• Gross annual labor savings (rounded): $78,100
• Net annual benefit (rounded): $73,100
• Rounding rationale: Rounded down to nearest $100 to avoid overstatement.

Section 6: Reliability, Risk Adjustment, and Limitations


• Reliability: High, supported by logs, task studies, and wage data.
• Risk adjustments: Not applied; conservatism implicitly adjusts.
• Limitations: Assumes 50,000 tasks annually; excludes revenue uplift.

Section 7: Recommended Supporting Exhibits


• System logs showing 50,000 tasks
• Time-motion sheets: 5 minutes per task
• Pilot/QC test results: 75% efficiency
• Payroll/BLS data: $25/hour
• Maintenance invoices: $5,000
• Sampling memo with methodology
• Sensitivity tables for alternative assumptions

Section 8: Sensitivity Example


• If e = 65% → Net = $62,708
• If e = 85% → Net = $83,542

Section 9: Conclusion — Appropriateness and Audit Readiness


The Cost Savings Method applied is appropriate, conservative, transparent, and auditable. Supporting
evidence and rounding conventions are included. Analyst affirms that the file contains all evidence
necessary for IRS replication.

Analyst’s Affirmation / Signature: __________________________

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