Valuation ResourcesYour guide to professional valuations
Valuation of Plant and Machinery
Plant and machinery can be considered hunks of useless metal or valuable productive equipment, depending on the standpoint of the observer. The design, manufacture and installation of plant and machinery is a costly endeavor and this machinery is generally commissioned to perform specific tasks.
Once this machinery is no longer able to be used in its current status, it can essentially be considered a liability, regardless of the initial outlay.
The value of machinery and equipment is not quite as simple as it may initially seem. Value and worth have different meanings and metrics depending on the observer. To the prospective buyer, the plant and equipment may have many associated values and issues to consider such as:-
– Current New Replacement Cost
– Original Purchase Price
– Current Availability of Similar Equipment
– Age, General Condition and Obsolescence
– Comparative Prices for Similar Equipment
– Residual Value
– Potential Future Use
– Cost Relocation
Whilst the equipment may have reached the end of its current functional use in its present working place, there may be considerable interest and value to secondary and downstream users. To the prospective seller, on the other extreme, may own a piece of cheap equipment which can be considered their most valuable asset due to its profitability and ability to produce a unique product.
Machinery Valuation Overview
Plant and machinery may essentially be considered only hunks of metal, if not in productive use.
Designed; machined; shaped; wired; interlocking and driven to produce specific tasks, however, should this machinery be unable to be produce in its current state or used profitably, this equipment may be considered similar to any discarded rusty car axle with little functional use or little monetary value.
Whilst this may be a logical statement, it falls short on premise.
Machines may often have extended life for secondary and tertiary users; in this – lies further Value.
What value, which value, value to whom?
What is it worth?
These questions may seem simple.
Owners may have preconceived ideas as to the value of their plant assets; however, consistently changing markets and new and evolving concepts in industry, affect the value of plant and machinery.
Since ownership, regardless of its form, is the exclusive right to possess, use, and/or dispose of the asset, the valuer does not really value the potential of the asset. The valuer assesses the current rights of ownership. As an example, machinery and equipment may be valued installed in a factory operating profitably or valued for disposal of out of hand. The values may differ significantly.
Valuation offers an opinion as to the monitory value of the assets, taking into consideration the valuer’s expertise and comparing local data and information where available within a defined time.
Basis of valuation are defined here-under:
Estimated New Replacement Cost.
This is our opinion of the estimated cost of replacing the asset as if new, at prices applicable at the valuation date, inclusive of fees and installation costs but exclusive of any finance charges or demolition costs.
The new costs are obtained by contacting the original or similar equipment manufacturers, suppliers or local representatives.
This is the value usually adopted for insurance purposes and can be used in certain inflation accountancy procedures.
In periods of inflation of costs we suggest that this can have two major effects upon your sums insured.
- Your sums insured are likely to fall seriously below adequate levels between renewal periods;
- In the event of a loss resulting in a major rebuilding program, escalations of costs are likely to occur during the replacement period:
Cost Approach – considers the estimated cost of acquiring and installing a new asset or a modern substitute asset having the same productive capacity as that existing, but exclusive of finance charges. This cost is then depreciated according to condition, utility, age, wear and tear, obsolescence taking into consideration past and present maintenance policy and rebuilding history in order to obtain the value. This value is only applied to assets being part of an operating concern and assumes adequate profitability. While the value represents the Open Market Value in continuation of existing use when considered as part of an operating unit, it does not necessarily represent the Open Market Value of the individual assets on a breakup basis. The valuation ignores any offer made, or transaction effected, by a purchaser with a special interest.
This value is only applied to assets being part of an operating concern and assumes adequate profitability. It is for the user of the valuation to decide if the Business is sufficiently profitable to support the asset value or whether some lower figure should be used.
Market Data or Comparative Sales Approach –considers prices recently paid for similar assets with adjustments made to the available market prices to reflect condition and utility of the valued assets relative to the market comparative available at the time, taking into consideration installation or removal and civil costs if applicable.
Assets for which there is an established secondhand market comparable is best valued on this basis.
Where no market comparables are found, the cost approach method may be used.
This approach considers the estimated cost of replacing the asset with one of a similar age and condition in the existing situation, inclusive of relevant professional fees and installation costs but exclusive of any finance charges or demolition costs.
On occasions Indemnity Value is market related. In these instances it encapsulates the position as we perceive it on the valuation date. Values may change as availability changes.
In some circumstances such as immovable items, the new cost depreciated according to age and condition may have to be used.
Depreciated Replacement Cost
This approach considers the estimated cost of replacing the asset as if new, at prices applicable at the valuation date, inclusive of fees and installation costs but exclusive of any finance charges or demolition costs. This cost is the depreciated on a “straight line” basis in accordance with the following formula: –
Depreciated Replacement Cost = Estimated New Replacement Cost LIFE (Years)
Depreciated Replacement Cost is a monetary statement of the remaining life of the asset based on the current capital costs.
This calculation is an inflexible approach in that it leaves little room for judgement on the part of the Valuer. It does however have merit in that the method of depreciation follows that used traditionally in company accounting albeit starting from current new cost and not historic cost. For this reason it is sometimes favoured by company accountants although it is not strictly speaking a fully reasoned valuation.