Valuation Techniques - Valuation of Machinery and other Fixed Assets

Valuation Techniques - Valuation of Machinery and other Fixed Assets - New!

In the current economy, businesses require less physical assets as in the past. However, many of the businesses are still dependent on fixed assets such as land, building, computers, furniture, fixtures, delivery trucks, automobiles, wiring etc. Machinery and equipment are an important part of an asset intensive business and less important for businesses that are based more on intangible assets, such as technology or service companies. 

The Valuation of Machinery and other Fixed Assets course covers the following four key sections that reflect the process of valuation of machinery and other fixed assets:

  1. Defining Stakeholders (Buyer, Seller, Government etc.)
  2. Defining the Purpose of Valuation (Buy/Sell, Insurance etc.)
  3. Selecting Valuation Techniques (Cost, Income, Market Approaches)
  4. Defining Objects of Valuation (References/Standards, Variables, Step-by-Step Valuation)

Characteristics of Machinery/Fixed Assets Valuation

The valuation process of machinery and equipment is unique as is valuation of other types of assets, such as real estate or intangibles. The valuation of machinery and equipment involves different variables that influence the value, e.g. liquidation value, going concern value, removal costs or installation costs. Therefore, it is important to understand whether a machine is valued as an individual item for exchange and whether it is considered as either in-situ (in place) or for removal. The nature of the assets also has to be taken into account during the valuation process. In comparison to real estate, plant and equipment will depreciate at a significantly faster rate.

Understanding the Value of Fixed Assets

Each fixed asset has a certain useful life, i.e. number of years for which the fixed asset is expected to generate economic benefits through continued use. Fixed assets lose value as they get older due to wear and tear, which is called obsolescence. Every fixed asset will have certain value at the end of its useful life, which is called salvage value. The salvage value depends on assets’ possible secondary use or the materials used in the asset that could be recycled.

The picture below demonstrate the three basic concepts. The salvage value is also affected by the dismantling costs, which the valuer has to consider during a valuation process. Likewise, installation costs play an important role in the valuation of machines or equipments that are to be purchased and installed. Understanding these basic principles and correct quantification of these variables are essential for performing a reliable valuation.

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