Plant

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Plant Machinery ValuationMethodologies
Presented by
Ir Mario E. Maninggo MRICS Director Valuation
Advisory Services

• February 2009

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Contents

• Market (Sales Comparison) Approach Application
• Direct Match
• Comparable Match
• Percent of Cost
• Cost Approach Application
• Replacement Cost New
• Depreciation
• Sequence of Cost Approach

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Part 1

• Market Approach Application

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Market Approach Application

• The following are the three most commonly used
  techniques in sales comparison or market
  approach.
• Direct Match
• Comparable Match
• Percent of Cost

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Market Approach Application

• Direct Match
• This technique establishes value based on a
  direct match of the subject to an identical asset
  or comparable.

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Direct Match
e.g Blue/Black 575M Maranello F1 Ferrari (2004
year built, 50,000km)
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Market Approach Application

• Comparable Match
• This technique establishes value based on
  analysis of similar (but not identical) assets
  using some measure of utility (size, capacity,
  etc) as the basis of comparison.

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Comparable Match
e.g 1981 Built, 5106 GRT Cargo Vessel
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Comparable Match

• Elements of Comparability
• Vintage Effective Age
• Condition
• Capacity
• Features (accessories)
• Location
• Manufacturer

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Comparable Match

• Elements of Comparability (cont)
• Motivation of Parties
• Price
• Quality
• Quantity
• Time of Sale
• Type of Sale

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Market Approach Application

• Percent of Cost
• This technique establishes value by first
  developing a ratio of the selling price to the
  Cost of Replacement as New of an asset at the
  time of sale.

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Percent of Cost
e.g 1998 model M550C Meiki Injection Moulding
Machine
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Part 2

• Cost Approach Application

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Cost Approach Application

• Cost approach application begins with the current
  replacement or reproduction cost estimates of the
  asset being appraised and then deducts for the
  loss in value caused by physical deterioration,
  functional obsolescence and economic obsolescence

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Replacement Cost New

• Reproduction Cost New vs Replacement Cost New
• Replacement cost new is the current cost of a
  property with utility equivalent to the subject
  property
• Reproduction cost new is the current cost of an
  exact replica of the property

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Replacement Cost New

• Various RCN Estimation Techniques
• Detailed-item Estimate
• Percentage of Delivered Equipment Cost Estimate
• Capacity Ratio Estimate
• Cost Indexing

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Replacement Cost New

• Detailed-item Estimate also known as QS estimate
  or Contractors Estimate
• Based on complete engineering drawings,
  specifications, and site surveys. Two main
  components are
• Direct Cost
• Purchased Equipment/Instrumentation
  Controls/Piping/Electrical Equipment
  Materials/Service Facilities/Installation Cost
• Indirect Cost
• Engineering Supervision/Construction
  Expenses/Contractors Fee/Contingency

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Replacement Cost New

• Percentage of Equipment Cost Estimate
• This method of estimation requires firstly the
  determination of delivered equipment cost. The
  other items included in direct and indirect cost
  are then estimated as percentage of the delivered
  equipment cost.
• Direct Cost
• Delivered Equipment Cost (DEC)
• Piping 10 66 DEC
• Instrumentation Controls 6 30DEC
• Electrical 1015 DEC
• Installation 10 DEC plus other equipment
  materials
• Indirect Cost
• Design, Engineering Supervision 10 DEC plus
  other equipment materials
• Construction Expenses 5 DEC plus other equipment
  materials
• Contractors Fee 5 DEC plus other equipment
  materials
• Contingency 10 DEC plus other equipment
  materials

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Replacement Cost New

• Plant Cost Capacity Ratio Estimate
• This method of cost estimate relates the cost of
  a plant to the cost of similar newly constructed
  plant by an exponential ratio.
• CostA CostB (Capacity Ratio) x
• Power factor X has been found to average
  between 0.6 and 0.7 for many process facilities.
  Please refer to any chemical or mechanical
  engineering handbook for capacity power factor of
  various kinds of processing plants
• Remark Cost Capacity Ratio can also be applied
  to individual equipment, please refer to same
  hand books for power factor reference

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Replacement Cost New

• Cost Indexing
• A cost index is merely an index value for a given
  point in time showing the cost at that time
  relative to a certain base time.

• Remarks Cost indexes can be used to give a
  general estimate, but no index can take into
  account all factors such as technological
  advancements or local conditions. The common
  indexes permit fairly accurate estimates if the
  time period involve is less than 10 years.

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Depreciation

• Three types or causes of appraisal depreciation
• Physical Deterioration
• Functional Obsolescence
• Economic Obsolescence

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Depreciation

• Physical Deterioration
• Physical deterioration is the loss in value or
  usefulness of an asset due to using up or
  expiration of its useful life caused by wear and
  tear, aging, exposure to various elements,
  physical stresses, and similar factors.

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Depreciation

• The four commonly use method of measuring
  physical deterioration
• Observation Method
• the valuer makes a comparison based on
  experienced by looking at similar assets and
  comparing them to new ones
• Use/Total Use Method
• physical deterioration is simply measured by the
  ratio of use and total use
• Direct Dollar Measurement
• this is applicable when specific components have
  deteriorated and can economically be cured
• Age/Life Technique
• age refer to the effective age of the asset
  whilst life stands for its useful life

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Depreciation

• Functional Obsolescence
• Functional Obsolescence is the loss in value or
  usefulness of an asset caused by inefficiencies
  or inadequacies of the asset itself, when
  compared to a more efficient or less costly
  replacement asset that new technology has
  developed.

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Depreciation

• Economic Obsolescence
• Economic obsolescence (sometimes called external
  obsolescence) is the loss in value or usefulness
  of an asset caused by external factors such as
  increased cost of raw materials, labor, supply
  and demand, increased competition, environmental
  or other government regulations, etc.

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Depreciation

• Measuring Economic Obsolescence

x 100

(
)n
Capacity B ------------------------ Capacity A
1 -

Inutility as a Percent
Where capacity A rated or design capacity
capacity B actual production
n exponent scale factor
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Part 3

• Sequence of Cost Approach to Value

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Sequence of Cost Approach to Value

• Sequence of Cost Approach
• Step 1 Reproduction Cost New/Replacement Cost
  New (RCN)
• Step 2 (RCN) less Physical Deterioration RCNLPD
• Step 3 RCNLPD less Functional Obsolescence
  RCNLPDFO
• Step 4 RCNLPDFO less economic obsolescence
  Depreciated Replacement Cost (DRC)

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QA

• Q A

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The End

• Thank you