Aim for Education that Fits Every Facet of Your Career G – Valuation of Plant & Machinery – Marks: 6

Valuation / Appraisal Value is used to describe worth. In the appraisal profession, the word value is never
The act or process of developing an opinion of value or the amount representing an opinion of used alone; it always appears with a modifier as in market value, fair value, insurable
value or estimation of value. value, and so on.

Basis of Value
A statement of the fundamental measurement assumptions of a valuation or the specific basis
(bases) upon which a valuation assignment has been completed.
It is critical that the basis (or bases) of value be appropriate to the terms and purpose of the
valuation assignment, as a basis of value may influence or dictate a valuer’s selection of
methods, inputs and assumptions, and the ultimate opinion of value. IVS defined bases of value
as Market Value, Fair Value, Equitable Value, Investment Value, Synergistic Value, Liquidation Market Value & Fair Value
Value, etc.
Purpose of Valuation
Valuation is required for a variety of purposes, including;
 Allocation of purchase price;
 Financing & bankruptcy;
 Dissolutions of Marriage, Partnerships, and corporations;
 Insurance & leasing;
 Management considerations;
Approaches to Value
 Mergers and acquisitions;
 Partnership formation and dissolution & Transfer of ownership;
 For various types of taxation and tax planning; and utility rate making.
Value is defined as “…an economic concept referring to the monetary relationship
between goods and services available for purchase and those who buy and sell them.”
 It is an estimation;
 May be higher, lower, or equal to the cost or price;
 The modifiers provide a specific definition of value
A. Market Value
The estimated amount for which an asset or liability should exchange on the valuation
date between a willing buyer and a willing seller in an arm’s length transaction, after
proper marketing and where the parties had each acted knowledgeably, prudently and
without compulsion.
B. Fair Value
Fair Value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date.
1. Income Approach
A valuation approach that provides an indication of value by converting future cash flows
to a single current capital value.

Cost, Price & Value 2. Market Approach

I. Cost A valuation approach which provides an indication of value by comparing the subject
asset with identical or similar assets for which price information is available.
Actual expenditure to create/manufacture or Amount required to reproducing, building,
Approaches to Value
or assembling an improvement.
3. Cost Approach
 In relation to production, not exchange; A valuation approach based on the economic principle that a buyer will pay no more for
 Either an accomplished fact or a current estimate; an asset than the cost to obtain an asset of equal utility, whether by purchase or by
construction.
 May be higher, lower, or equal to the asset’s value
II. Price Valuation Method

The amount a particular purchaser agrees to pay and a particular seller agrees to accept A specific technique or model used to estimate value. All valuation methods fall within a
under the circumstances surrounding their transaction. valuation approach.

 Income Approach : Capitalization or DCF Method

 Once finalized, refers to a sale or transaction price and implies an exchange;
 Market Approach : Sale Comparison Method
 It is a fact;  Cost Approach : Reproduction, Replacement or Summation Method
 May be higher, lower, or equal to the asset’s value Type of Property
III. Value
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There is a specific valuation method relevant for each of the categories of property. Therefore,
properties are categorized in the following manner.
Investment properties are those that produce net monetary return either in the flow of net
income or as a capital gain, or both.
Non-Investment Properties have not the characteristic of generating monetary returns to its
owner but they yield benefits in the form of use and/or consumption.
Investment Properties
 Trading enterprise
 Theatre business
 Industrial plant
 Public utility enterprise
 Hotel building constructed on freehold
land
 Office building with several tenants
constructed on freehold land
 Multi-storied residential premises
 Car parking space given on rent
 Multi-tenant building constructed on
lease-hold land
 Distributor’s franchise
 Motion pictures (for rent)
 Vacant land held for future sale
Type of Property
Marketable Non-Investment Properties
 Freehold single-family owner occupied
residential house constructed on freehold
land
 Lease-hold single-family owner-occupied
residential house constructed on lease-
hold land
 Private Vehicle & Personal clothing
 Furniture & Office equipment
 Germs and jewelry
Property Classification
Investment Property
Marketable Non-Investment Property
Non-Marketable Non-Investment Property
(Service Property / Utility)
Property Classification
Investment Property
Marketable Non-Investment Property
Aim for Education that Fits Every Facet of Your Career G – Valuation of Plant & Machinery – Marks: 6
Service Property Owner Value (Cost Approach)
Real Property Personal Property
 The rights, interests, and benefits  Property that is not real property
connected with real estate
 Real estate is the physical parcel of land,  The salient characteristic of personal
improvements to the land (such as clearing property is its movability without damage
& grading), improvements attached to the either to itself or to the real estate to which
land (such as paving and buildings), and it is attached
Non-Investment Properties appurtenances (such as easements that  Its nature is not permanently attached
 Freehold single-family owner occupied cross the parcel or give access to the
residential house constructed on freehold parcel)
land. Criteria for distinguishing whether an item is real or personal property in a particular situation
 Lease-hold single-family owner-occupied usually include intent of owner, means of attachment, contribution to highest and best use (real
residential house constructed on lease- estate), relevant case law and statutory, regulatory, and legal guidelines
hold land. Personal Property
 Religious Property Tangible Property Intangible Property


Public School
Jail, City Hall etc.
 Machinery & Equipment,  Cash & Shares &Annuities,
 Private Vehicle  Marine Vessels,  Patents & Stocks & Bonds,
 Non-profit making Hospital  Aircraft,  Notes Receivable & Accounts Receivable,


Personal Clothing
Furniture
 Motor Vehicles,  Insurance Policies,
 Office Equipment  Furniture & Fixtures,  Licenses, Contracts & Franchises,
 Germs and Jewelry  Tools, Dies, Jigs, Patterns, and  Certificates of Deposit, &
 Stock in Trade  Copyrights & Goodwill
Non-Marketable Non-Investment Type of Market
Properties
1. Perfect Market
 Religious Property
 Public School Perfect competition is a market system characterized by many different buyers and
 Jail, City Hall etc. sellers. In the classic theoretical definition of perfect competition, there are an infinite
 Non-profit making Hospital number of buyers and sellers. With so many market players, it is impossible for any one
 Stamp Collection
participant to alter the prevailing price in the market. If they attempt to do so, buyers
and sellers have infinite alternatives to pursue.
Features: Large number of buyers and sellers, Homogenous goods, Free entry and free exit,
Profit maximization, No Government regulation, Perfect mobility of factors, Perfect
Value Characteristics
 Monetary yield to the owner knowledge
 Marketability 2. Monopoly Market
 Recovery of invested capital
 Usefulness to the owner without direct A monopoly is the exact opposite form of market system as perfect competition. In a pure
monetary yield monopoly, there is only one producer of a particular good or service, and generally no
 Marketability reasonable substitute. In such a market system, the monopolist is able to charge
 Non-recovery of original cost in general whatever price they wish due to the absence of competition, but their overall revenue
 Usefulness to the owner without direct
will be limited by the ability or willingness of customers to pay their price.
monetary yield
 Non-marketability Features: Single seller and large number of buyers, No close substitute, Restriction on the
 Non-recovery of original cost in general entry of new firms, Price maker, Possibility of Price Discrimination
Primary Element of Value 3. Oligopoly Market
Investment Value (Income Approach)
Market Value (Market Approach)
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 Aim for Education that Fits Every Facet of Your Career
An oligopoly is similar in many ways to a monopoly. The primary difference is that rather
than having only one producer of a good or service, there are a handful of producers, or
at least a handful of producers that make up a dominant majority of the production in the
market system. While oligopolists do not have the same pricing power as monopolists, it
is possible, without diligent government regulation that oligopolists will collude with one
another to set prices in the same way a monopolist would.
Features: Few Sellers, Interdependence, Nature of Product, Barrier to Entry
4. Monopolistic Market
Monopolistic competition is a type of market system combining elements of a monopoly
and perfect competition. Like a perfectly competitive market system, there are numerous
competitors in the market. The difference is that each competitor is sufficiently
differentiated from the others that some can charge greater prices than a perfectly
competitive firm. An example of monopolistic competition is the market for music. While
there are many artists, each artist is different and is not perfectly substitutable with
another artist.
Features: Large number of sellers and buyers, Product Differentiation: Real
Differentiation, Artificial Differentiation, Non-price competition, Selling Cost, Free entry
and free exit, Independent price policy
5. Monopsony
Market systems are not only differentiated according to the number of suppliers in the
market. They may also be differentiated according to the number of buyers. Whereas a
perfectly competitive market theoretically has an infinite number of buyers and sellers, a
monopsony has only one buyer for a particular good or service, giving that buyer
significant power in determining the price of the products produced.
Type of Market: Buyers Market, Sellers Market or Stable Market
Demand and Supply Curve
1. Demand
Law of Demand:
The functional relationship between the price of commodity and its quantity demanded;
It states that the demand for a commodity tends to vary inversely with its price;
Both individual and market demand curves
slope downward from left to right indicating
an inverse relationship between price and
quantity demanded of goods
Remaining unchanged: Income of the people, Taste, preference and habits of consumers, Prices of
related goods, no expectation of future change in price of the commodity, commodity in question is
not consumed for its prestige value.
2. Supply
G – Valuation of Plant & Machinery – Marks: 6
It is defined as a quantity of a commodity offered by the producers to be supplied at a
particular price and at a certain time
Law of Supply:
If the price of commodity rises, the level of quantity supplied rises, after factors reaming
constant.
Bell Curve
BELL CURVE
Apart from the demand and supply aspect, it is interesting to study the determination of price of
a commodity in common market between a buyer and a seller. There are group of buyers in the
market who compete with each other to acquire the commodity. Each buyer determines highest
price he is prepared to pay, on the basis of his individual capacity to pay (wealth). He also
estimates a fair cost of the product and his need and urgency to acquire the said product. In fact
his attempt is to get the product on payment of minimum price.
On the other hand, there are groups of sellers in the market who compete with each other to sell
their product. Each seller determines lowest possible price for sale on the basis of same
parameters viz. cost of products, profit margin, capacity to withhold sale of product, need and
urgency for sale. In fact, expectation of seller is to get highest possible price for his product but
he succumbs to the market forces.
If offered price is higher than highest price determined by the buyer or it is lower than lowest
price determined by seller, the transaction or sale of product does not take place. But in all
other cases transaction takes place after bargaining for the price.
Buyers curve A-B-C shows number of buyers at different price levels. ‘A’ price is offered by
minimum number of buyers in the market. Transaction does not take place if the said price is an
unviable price. At ‘B’ price, there are maximum numbers of buyers who are willing to buy.
Transaction may take place or may not take place. At ‘C’ price again there are minimum
numbers of buyers because said price is considered very high by buyers
Sellers curve d-e-f indicates a number of sellers at different price levels. At ‘D’ price there are
hardly any sellers able to sale their product because buyers will consider said price too high. At
‘E’ price there are maximum numbers of sellers. Transaction may or may not take place at this
price. Again at ‘F’ price there are minimum sellers because said price is considered too low by
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 Aim for Education that Fits Every Facet of Your Career
sellers.
Thus most of the transactions take place in the market in the price range of ‘F’ and ‘C’. Price ‘G’
can be said to be ideal price as it is average price of highest price that would be offered by a
willing buyer and lowest price that would be acceptable to any willing seller. It is said that in
perfect competition market, transaction takes place at ideal price ‘G’.
In real estate market, there is no such common market place as we have for commodity market.
However, these concepts do operate in real estate market. There is a range of prices for any
specific property depending upon individual buyer’s needs, their paying capacity and
estimation of cost of said property by each individual buyer. Demand and supply factor and
factor for availability of substitute property in the market operate in this market with equal
force.
In order to arrive at fair price of a commodity in the market, buyer as well as seller considers
various characteristics of the product viz. it use, its physical benefit, service life, etc. Similarly for
real estate viz. land or land with building/s; buyer and seller consider various characteristics of
properties viz. its usage, its service life (for building) its resale value, benefit of infrastructure
amenity and civic amenities etc.
Definition
1. Plant & Machinery
It is an installations and support facilities for manufacturing in an industry designed to
perform a specific pre-determined function, whether used singly or in combination with
other items to enhance the productivity or operating facility; and includes all devices in
fixed or movable form, other than real estate, deployed in manufacturing, processing or
assembling of products from the stage of raw materials to finished goods.
As per IVSC:
A class of tangible asset that is:
A Held by an entity for use in the production or supply of goods or services, for rental
by others or for administrative purposes &
B Expected to be used over a period of time.
2. Plant
The assemblages of assets that may be include specialized non-permanent buildings,
machinery, and equipment.
As per VPGA 5: Valuation of Plant & Equipment
Assets that are combined with others and that may include items that form part of
industrial infrastructure, utilities, building services installations, specialized buildings,
and machinery and equipment forming a dedicated assemblage.
3. Machinery
A machine is an apparatus using or applying mechanical power, having several parts
each with a definite function, and together performing certain kinds of work.
As per VPGA 5: Valuation of Plant & Equipment
G – Valuation of Plant & Machinery – Marks: 6
Individual, or a collection or a fleet of machines that may be employed, installed or
remotely operated in connection with a user’s industrial or commercial processes, trade
or business sector. Equipment
Ancillary assets that are used to assists the function of the enterprise / entity.
As per VPGA 5: Valuation of Plant & Equipment
An all encompassing term for other assets such as sundry machinery, tooling, fixtures,
furniture and furnishings, trade fixtures and fittings, vehicles and loose tools that are
used to assist the operation of the enterprise or entity.
4. Value-in-Use
As per IVS 2017
The present value of the future cash flows expected to be derived from an asset or cash-
generating unit.
Value-in-use is the worth of a plant and machinery to a specific user or set of users. As
value-in-use is related to specific user’s need, it is often referred to as subjective value
or non-market based.
Value-in-use in the realm of PME may arise as a replacement concept under situation of
specialty e.g., a company hopes to revive its position by switching over to a technique
that requires a purchase of typical equipment which is generally not available in the
investor’s market. In such situation the company may bargain to offer much above the
market price to improve its situation. Such subjective price shall measure the value-in-
use of the particular equipment. The additional price paid may be considered
intangible.
5. Value-in-Exchange
Value-in-exchange is the price that would tend to prevail in a free, open and competitive
market on the basis of an equilibrium set by the forces of supply and demand. This may
be true for an item to be moved from one place to another or an entire plant in place.
This is sometimes referred to as objective value because it is based on observable
economic forces. A common form of value-in-exchange is market value and it is
market based.
6. Value to Buyer
It is a capitalized value of additional income generated due to acquisition of any
additional industrial plant.
7. Value to Seller
It is a deprival value i.e. capitalized value of income foregone.
8. Value to Occupier
It is a capitalized value of income generated by the asset which held under right to use.
9. Value in Existing Use In-Situ
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 Aim for Education that Fits Every Facet of Your Career
Market value of PME utilized for current use and at location where it is installed on
date of value.
10. Value in Existing Use in Ex-Situ
Market value of PME utilized for current use and at different location than where it is
installed on date of value.
11. Value in Alternative Use In-Situ
Market value of PME utilized for other than the existing use and at location where it is
installed on date of value.
12. Value in Alternative Use in Ex-Situ
Market value of PME utilized for other than the existing use and at different location
than where it is installed on date of value.
13. Liquidation Value
As per IVS 2017
Liquidation Value is the amount that would be realized when an asset or group of
assets are sold on a piecemeal basis. Liquidation Value should take into account the
costs of getting the assets into saleable condition as well as those of the disposal
activity.
Liquidation Value can be determined under two different premises of value:
A An orderly transaction with a typical marketing period, or
B A forced transaction with a shortened marketing period
As per Insolvency and Bankruptcy Code, 2016 (IBC Code)
Liquidation Value is the estimated realizable value of the assets of the corporate
debtor if the corporate debtor were to be liquidated on the insolvency commencement
date.
14. Orderly Liquidation Value
The value of a group of assets that could be realized in a liquidation sale, given a
reasonable period of time to find a purchaser (or purchasers), with the seller being
compelled to sell on an as-is, where-is basis.
15. Forced Sale Value
The forced sale value is often used in circumstances where a seller is under
compulsion to sell and that, as a consequence, a proper marketing period is not
possible and buyers may not be able to undertake adequate due diligence.
The price that could be obtained in these circumstances will depend upon the nature
of the pressure on the seller and the reasons why proper marketing cannot be
undertaken.
16. Highest and Best Use
The use of an asset that maximizes its potential and that is physically possible, legally
permissible and financially feasible.
G – Valuation of Plant & Machinery – Marks: 6
Highest & best use in relation to PME
Highest and best use as applicable to plant and machinery is defined as that use of the
plant and machinery which may reasonably be expected to produce the greatest net
return over a given period of time, and legal use which will yield the highest present
value.
Highest and best use of any individual unit or total operating facility may not be its
present use. Hence an analysis must be made to determine the highest and best use of
plant and machinery being valued.
The following considerations pertinently arise:
Possibility (physical), Permissibility (legal), Feasibility (financial), Profitability
(economic)
17. Fixture
It is a personal property that has been attached to realty (land and/or improvements)
in such as manner as intended not to be removed without substantial damage to the
realty or
Personal property permanently attached to real estate that has become part of the real
estate.
 If attached to the realty in such a manner that its removal would damage the
real property or the fixture, the fixture is realty.
If the fixture is removable without damage, it is generally considered personal
property
18. Furniture
A particular type of equipment utilized in ancillary functions of an operation which is
designed to provide a convenient and efficient work location for personnel or
necessary storage facilities.
Valuation Maxims of PME
Physical Type, Make, Model, Capacity, etc. (Technical Specification)
Legal Zoning, Environmental Protection Laws, Taxation Policy, etc.
Social The taste & preference of consumers utilizing products
Economic Government Incentives, Level of Wages, Availability of Credit,
Price Level, Taxes, etc.
Utility Degree of render a services
Marketability Potential of being or fit to be sale / Degree of demand of identical
or similar asset
Transferability Prospect of changes of Ownership / Rights / Possession, etc.
Scarcity Demand & supply and alternate uses to which the goods or service
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 Aim for Education that Fits Every Facet of Your Career G – Valuation of Plant & Machinery – Marks: 6
may be put
Present Worth of Future Prospect of future
Benefits
Intangible Rights or Licenses, Statutory Permission, Brand Name, Copy Rights, etc.
Factor

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