CHAPTER 2:

Valuation of Machinery &

Equipment

1
GUIDELINES FOR SOME SITUATIONS OF MACHINERY
AND EQUIPMENT VALUATION

2
 Example 1. Income approach
A company is operating an equipment with an economic life of 10 years, the
equipment has been used for 5 years. The estimated annual net cash flow of the
equipment is VND 200 million, the current value of the equipment is VND 630
million and the liquidation value at the end of its life is zero. Currently, the company
is considering to buy a new equipment to replace the old one. Information about the
investment plan is as follows:
- This device is offered for sale by the supplier for: 1000 million VND Initial cost
- The economic life of the equipment is 5 years Years of net cash flow
- Profit after tax received over the years from exploiting equipment is: 60, 90, 130,
150 and 100 million dong, respectively. Annual cash flow
- The company uses the straight-line depreciation method
- Equipment is invested with 100% equity
- The 5-year government bond yield is 8.5% Discount rate = Risk-free
- Risk surcharge is 3.5% rate+ Risk adjustment
- The liquidation value of equipment at the end of the investment cycle is 20 million
VND
- The corporate income tax rate is 25%
Should the company implement the equipment replacement plan?
Example 1. Solution

Định giá tài sản (Assets Valuation) 4

Example 2. Cost approach
Company A in Hanoi needs to appraise a spectroscopic device to include
in its accounting as a fixed asset. The detailed profile has the following
data:
Model: Michigan 250 manufactured by Michigan company of the US in
2000
Technical specifications:
- Optical system with 2 beams
- Wavelength 190-1200nm
- Photometric range -3.0 - 6.0 A
- Spectral slit width 0.5; 1.0; 2.0; 4.0nm
- Wavelength resolution: 0.1nm .
- Monochrome generator control speed: 4000nm/min
The configuration of the machine includes: Spectrometer Michigan Ex
250; Shelf; Deep soft; Computers and printers

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Example 2. Cost approach (cont.)
The detailed profile has the following data:
- According to the import contract, the equipment was purchased brand-
new at the end of 2001 with a total value (including transportation and
installation costs at the laboratory) of VND 200 million. Equipment is used
continuously from the time of purchase to the present time (end of 2007)
- Actual inspection shows that the equipment is in normal operation.
- The actual level of depreciation corresponds to the level of depreciation
reflected on the laboratory's accounting books.
- Period of use of equipment as prescribed by the Ministry of Finance is 10
years
- Laboratory applies the depreciation method according to the method of
decreasing balance with adjustment to the original cost of the equipment
as 200 million dong.
- Surveying market information shows that the current selling price of a
brand-new spectrometer is 550 million (including installation, shipping
and 10% VAT).
- Valuate the spectrometer.
- VAT is calculated by the deduction method 6
Exercise 1

Appraise a used truck, manufactured in 2005, tonnage 7

tons, original price 800million, used for 6 years, total
mileage is 1,000,000 km. Total kilometers for a vehicle
model of the same type of vehicle is determined to be
2,000,000 km.
To ensure safe operation of the vehicle, it is necessary
Replacement of some spare parts, details and assemblies
with market prices as follows:
– Car tires 3 sets 1200-200 10,000,000 VND
– Driveshaft gearbox 12,000,000 VND
– Car brake pads 6,000,000 VND
– Battery 2,000,000 VND

Định giá tài sản (Assets Valuation) 7

Exercise 2

Appraise a model Y lifting manufactured by Company X in

1995 at the manufacturer's cost $50,000 (FOB). The
current replacement cost is $60,000. You estimate all types
of depreciation (amortization depreciation) is 25% and the
capitalization rate is 40%. Pricing guide states that
machines similar to the 1995 model Y machine, available
on the used market, selling at prices from $35,000 to
$40,000. ABC's market survey report says that very few
model Y machines are available on the market for rent.
However, when they are available, total rental income is
about $20,000/year minus 10% of related costs.
What is the fair market value using valuation approaches:
cost, market and income. What is the conclusion to be
drawn as to the fair market value of the machine to be
valued? 8
Exercise 3

A production line has a technical life of 15 years, an

economic life of 10 years, and an effective life of 6 years.
Appraise the line known that:
- Currently, this production line does not exist on the
market. After calculation, the costs to creating a similar
production line is estimated at 5,000 million VND.
- However, technical experts estimate the product
manufacturing capacity of the production line is only 4/5
of that of a production line using more advanced
technology. Therefore the experts estimates that the
devaluation of this line is equivalent to 1/5 of the value of
the production line.

Định giá tài sản (Assets Valuation) 9

Exercise 4

A Japanese Toyota brand car is currently used to deliver

goods for a textile factory, produced in 2000 with a tonnage
of 4 tons, used for 6 years.
Related information about this car is as follows:
- At the time of purchase, this car costs 750 million VND,
VAT is 10%, test running cost is10 million VND.
- The expected economic life of a car is 15 years.
- However, to ensure safe operation of the vehicle, it is
necessary to replace some spare parts and details
estimated about 26 million VND.
- VAT is calculated according to the deduction method.
Request: Appraise that car?

Định giá tài sản (Assets Valuation) 10

Exercise 5

A manufacturing company is considering an offer to

purchase and install a product packaging line. The
purchase price of the line is 320,000 USD, the cost of
transportation, installation and other accompanying costs is
30,000 USD. The expected lifespan of the line is 5 years.
The operation of line is expected to increase the company's
annual net revenue is 144,000 USD but at the same time
costs increase by 90,000 USD (including depreciation
costs).
Knowing that the market interest rate is 10%, the corporate
income tax rate is 22%. Depreciation is calculated using
the straight-line method.
Please advise the company whether to buy and install that
line or not. Why ?
Định giá tài sản (Assets Valuation) 11
Exercise 6.

A textile factory has a Japanese Toyota brand truck

manufactured in 2005 with load capacity 4 tons, used for 3 years
already, currently used to transport goods for the factories.
Appraise the truck if:
- At the time of purchase, this car has a CIF price (import price
includes shipping and insurance costs) is 1,000 million VND,
import tax is 20%, special consumption tax rate is 25%, VAT
is 10%, and the trial run cost is 10 million VND.
- The expected economic life of a car is 15 years.
- However, to ensure safe operation of the vehicle, it is
necessary to replace some spare parts and components
about 30 million VND.
- VAT is calculated according to the deduction method

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Exercise 7
Appraise a production line imported from France with an
expected economic life of10 years and has been in operation
for 4 years. Currently on the market there is no such type of
this production line.
This production line import dossier contains the following
information:
- This line is imported at the FOB price at the export border
gate stated on the foreign trade contract100,000 USD.
- Shipping cost from France to Saigon port is 5,000 USD.
- International insurance cost for this line is 5,000 USD.
- The import tax rate for this chain is 15%. The special
consumption tax rate is 10%.
- Value added tax rate is 10%. Enterprises account for value
added tax according to method of input value added tax
deduction method. 13