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M&E Case Study Solution
M&E Case Study Solution
Introduction
The purpose of the valuation is a market value appraisal as of current date of the production machinery and
equipment owned by a pharmaceutical company SyrupWorld Co. The market value of the line has to be
analyzed under the in continued use premise, purpose of valuation is financial reporting.
The subject plant produces 2 sorts of syrups and mistures, and its annual net production capacity is about 6
thousand tonnes of syrup regardless of the sort, which amounts to 119.8 mln 50ml vials.
The plant is operated two 8-hour shifts a day, 5 days a week. The third shift is for the mandatory regular
maintenance and repair. Once a year the plant is fully stopped for 10-day annual maintenance and repair.
High-level scheme of the production process (core equipment only) is shown below.
IST
#1
VFL #1
IST
#2
VFL #2
IST
#3
VFL #3
M #1
Packing
and
palletizing
M #2
The plant has some history and is a mix of new and older equipment. You have been provided with certain
basic information on the subject assets which is outlined in the following table (core assets). Book values are
provided as of valuation date.
Type of equipment
Gross book
value, rubles
Net book
value, rubles
Commencement
year
Mixer #1
7,342,045
4,405,227
2007
Mixer #2
5,283,452
1988
3,516,360
6,408,811
3,117,450
8,600,000
12,500,000
11,000,000
2,461,452
5,539,713
1,714,598
1,720,000
8,750,000
7,700,000
2005
2010
2002
2003
2008
2008
Capacity data
3 tonnes working volume,
1.1 tonnes/h
3 tonnes working volume,
0.8 tonnes/h
4 tonnes
3 tonnes
3 tonnes
200 pieces/min
160 pieces/min
160 pieces/min
Type of equipment
Gross book
value, rubles
Net book
value, rubles
Commencement
year
Capacity data
7,500,000
6,750,000
2010
CIP washer
5,000,000
2,500,000
2006
Technological pumps
Technological piping
Water preparation
Electrical networks
Monitoring and testing
equipment
Storage racks
1,245,000
1,000,000
1,475,003
2,000,000
533,571
428,571
1,032,502
1,200,000
2007
2007
2008
2005
2,000,000
857,143
2007
5,000,000
2,000,000
Lift trucks
4,000,000
3,000,000
2005
2006, 2007,
2008, 2009
n/a
Four 2-tonne Jungheinrich
EFG 220 trucks
200 pallets/day
After visiting the plant, having discussions with the respective personnel and working with appropriate
documentation, you have identified the following points to consider:
Inventory
number
Asset name
Country of origin
ME0001
Syrup mixer #1
Germany
ME0002
Syrup mixer #2
Germany
ME0003
France
ME0004
ME0005
France
France
ME0006
Italy
ME0007
Italy
ME0008
Italy
ME0009
ME0011
Packaging robot
combined with palletizer
CIP washing station
USA
No special comments
Italy
No special comments
Inventory
number
Asset name
ME0013
Technological pumps
ME0014
Technological piping
ME0015
Water preparation
ME0016
Electrical networks
ME0018
various
Lift trucks
ME0017
Country of origin
Italy
Various suppliers
from Europe
Russia
Various suppliers
from Europe
Germany
Russia
Germany
After making research on applicable pricing trends with respect to different geographies and type of
equipment, you have identified the following indices to consider:
Country of
origin
Germany,
Italy, France
Germany,
Italy, France
Assets
European,
except piping
and electrical
networks
Piping and
electrical
networks
Source and
URL
Eurostat
http://epp.eurostat.ec.europa.eu/portal
/page/portal/short_term_business_stati
stics/data/database
Eurostat
-- //--
Index group
United
States of
America
Produced in
USA
Russia
Produced in
Russia
Rosstat
http://www.gks.ru/dbscripts/cbsd/DBIn
et.cgi
SOLUTION
You start your valuation analysis with deciding on valuation approaches and methods that seem to be most
appropriate to use in respect to the subject assets under given circumstances:
Asset name or category
Mixers
Interim storage tanks
Vial filling lines
Packaging robot combined with palletizer
CIP washing station
Technological pumps
Technological piping
Water preparation
Electrical networks
Monitoring and testing equipment
Storage racks
Lift trucks
2011
2012
40.9038
39.8618
29.3948
31.1079
In the process of developing price trends, we have decided to use half-year numbers for all years except
2011 and end-of-year number for 2011 (exactly as of valuation date). Raw data take from various online
databases (Eurostat, BLB, Rosstat) was summarized in the following table (raw data from Rosstat was
aligned to end-of-January 2002 base level).
Tag
1999Q2
2000Q2
2001Q2
2002Q2
2003Q2
2004Q2
2005Q2
2006Q2
2007Q2
Euro area
(17
countries)
MIG-CG
98.54
99.35
100.36
100.50
100.17
99.95
99.96
99.89
Euro area
(17
countries)
FB&T
97.48
99.66
99.48
99.91
102.86
107.15
2008Q2
100.04
2009Q2
2010Q2
GEO
Germany
France
Italy
USA
Russia
FB&T
97.11
98.35
99.38
101.62
99.94
99.70
104.50
107.64
FB&T
75.22
74.07
84.22
84.37
97.93
96.24
-
FB&T
97.40
97.90
99.47
100.10
101.53
106.43
PP&B
190.10
191.30
197.00
200.20
204.60
206.80
PPI-M
101.74
112.04
123.73
135.73
148.51
174.39
114.92
108.20
122.40
221.70
212.46
101.05
114.46
110.77
118.60
228.40
231.73
101.20
114.39
109.63
119.57
232.70
247.38
2011Q2
102.07
115.91
111.50
120.34
237.80
257.69
2011Q4
2012Q2
102.37
103.42
117.72
118.65
112.20
113.16
122.94
123.80
242.40
245.60
258.81
261.93
Based on the above, Reproduction cost new for the subject assets within the indirect method of the Cost
approach is derived as follows:
EUR
Average
xrate date on
35.0297
Average
xrate val.date
39.8618
Index
Value date on
107.64
Index
Value val.date
113.16
FB&T
Eurostat
EUR
39.8618
FB&T
Eurostat
France
EUR
35.1636
39.8618
#N/A
113.16
FB&T
Eurostat
99.91
2009
France
EUR
40.2157
118.65
39.8618
FB&T
Eurostat
114.39
118.65
2002
France
EUR
2003
Italy
EUR
29.6900
39.8618
FB&T
Eurostat
97.48
118.65
34.6817
39.8618
FB&T
Eurostat
97.90
2007
Italy
123.80
EUR
36.4466
39.8618
FB&T
Eurostat
122.40
2007
123.80
Italy
EUR
36.4466
39.8618
FB&T
Eurostat
122.40
123.80
2010
USA
USD
30.3765
31.1079
PP&B
BLS
232.70
245.60
2006
Italy
EUR
34.1144
39.8618
FB&T
Eurostat
101.53
123.80
Technological pumps
Technological piping
2007
Italy
EUR
35.0297
39.8618
FB&T
Eurostat
106.43
123.80
2007
Europe
EUR
35.0297
39.8618
MIG-CG
Eurostat
99.89
103.42
Water preparation
Electrical networks
Monitoring and testing
equipment
2008
Russia
RUR
PPI-M
Rosstat
212.46
261.93
2005
Europe
EUR
35.1636
39.8618
MIG-CG
Eurostat
99.95
103.42
2007
Germany
EUR
35.0297
39.8618
FB&T
Eurostat
107.64
113.16
Date On
Country
of origin
Currency
Syrup mixer #1
2007
Germany
Syrup mixer #2
1988
Germany
2005
Asset Name
Trend
tag
Source
Storage racks
Lift trucks
2005
Russia
RUR
PPI-M
Rosstat
135.73
261.93
various
Germany
EUR
39.8618
Asset Name
Gross book
value, as of
reporting date
xrate
trend
factor
1.138
price
trend
factor
1.051
final
trend
factor
1.196
RCN indirect
Syrup mixer #1
7,342,045
8,783,281
Syrup mixer #2
5,283,452
n/a
n/a
n/a
n/a
4,922,904
1.134
1.188
1.346
6,627,408
5,831,277
0.991
1.037
1.028
5,995,213
3,117,450
1.343
1.217
1.634
5,094,463
8,600,000
1.149
1.265
1.453
12,499,508
12,500,000
1.094
1.011
1.106
13,827,674
11,000,000
1.094
1.011
1.106
12,168,353
7,500,000
1.024
1.055
1.081
8,106,366
CIP washer
5,000,000
1.168
1.219
1.425
7,123,861
Technological pumps
1,245,000
1.138
1.163
1.324
1,647,959
Technological piping
1,000,000
1.138
1.035
1.178
1,178,157
Water preparation
1,475,003
1.000
1.233
1.233
1,818,429
Electrical networks
2,000,000
1.134
1.035
1.173
2,345,931
2,000,000
1.138
1.051
1.196
2,392,598
Storage racks
5,000,000
1.000
1.930
1.930
9,649,117
Lift trucks
4,000,000
n/a
n/a
n/a
n/a
Note that not possible to apply indirect method to all of the assets, some items do have this number.
Direct method cost-to-capacity, replacement vs.reproduction considerations and adjustments
There is a number of Replacement cost new considerations that arise from known information regarding
the subject equipment:
1. Syrup mixer #2.
This mixer is quite old and we were not able to estimate its cost as new by using indirect method. We will
take our Syrup mixer #1 as a modern equivalent and build cost new estimate for M#2 on this basis via costto-capacity method:
Applicable cost-to-capacity factor:
Replacement cost for M#2:
0.66
8,783,281 (via indirect method) * (2.1/3)^0.66 = 6,940,991 rubles
4+3+3 = 10 tonnes
5 tonnes
5,995,213 rubles
0.66
5,995,213 * (5/3)^0.66 = 8,398,946 rubles
8,398,946 * 2 = 16,797,891 (two tanks required)
13,827,674 rubles
12,168,353 rubles
1,659,321 rubles
829,660 rubles
11,372,292 rubles
11,713,461 rubles
12,543,122 rubles
85,338,142 rubles
10,240,577 rubles
5,973,670 rubles
8,533,814 rubles
Determining depreciation
1. General Age/Life.
General equation used with the age/life analysis is the following: NUL = EA + RUL, where NUL is expectation
of total life for a given asset in the beginning of its life (Normal Useful Life); EA effective age (in contrast to
chronological age); RUL = remaining useful life.
We have already identified NULs for the subject equipment; we also know that RUL estimation for the older
mixer is 3 years. This seems to be the only asset where effective age differs from chronological age.
All age/life calculations may be summarized as follows:
Asset Name
Syrup mixer #1
Syrup mixer #2
Interim storage tank #1
Interim storage tank #2
Interim storage tank #3
Vial filling line #1
Vial filling line #2
Vial filling line #3
Packaging robot combined with palletizer
CIP washer
Technological pumps
Technological piping
Water preparation
Electrical networks
Monitoring and testing equipment
Storage racks
Lift trucks
Date
On
NUL
RUL
(linear)
2007
1988
2005
2010
2002
2003
2008
2008
2010
2006
2007
2007
2008
2005
2007
2005
various
15
15
25
25
25
22
22
22
12
12
12
12
12
15
7
10
10
10
-9
18
23
15
13
18
18
10
6
7
7
8
8
2
3
-
RUL
(manual)
RUL
(final)
10
3
18
23
15
13
18
18
10
6
7
7
8
8
2
3
-
Physical
depreciation percentage
33%
80%
28%
8%
40%
41%
18%
18%
17%
50%
71%*
42%
33%
47%
71%
70%
-
1,500,000 rubles
8,783,281 rubles
7,283,281 rubles this number is subject to adjustments according to
age/life percentage as shown above
1,200,000 rubles
15%
4 years (from age/life)
year
2013
loss
1,200,000
discount
15%
rate
discount
0.870
factor
discounted
1,043,478
loss
2014
1,200,000
2015
1,200,000
2016
1,200,000
15%
15%
15%
0.756
0.658
0.572
907,372
789,019
686,104
3,425,974 rubles
4. Diminishing value.
Diminishing value depreciation is calculated according to the following equation:
DV (%) = Residual Value ^ (Age/NUL), where Residual Value represents value of a given item as a portion of
its cost new in the end of its useful life (when Age=NUL). For the subject pumps, calculations are as follows:
Residual value
Age
NUL
DV (%)
Physical depreciation (%)
Physical
depreciation
- percentage
33%
Functional
obsolescence "direct dollar"
Asset Name
RCN
indirect
Syrup mixer #1
8,783,281
8,783,281
Syrup mixer #2
n/a
6,940,991
6,940,991
80%
1,388,198
6,627,408
6,328,956
6,328,956
28%
4,556,848
5,995,213
5,234,468
5,234,468
8%
4,815,710
5,094,463
5,234,468
5,234,468
40%
3,140,681
RCN direct
RCN final
12,499,508
12,499,508
41%
13,827,674
12,543,122
12,543,122
18%
10,262,554
12,168,353
12,543,122
12,543,122
18%
10,262,554
17%
6,755,305
3,561,930
Technological pumps
3,425,974
3,960,099
8,106,366
8,106,366
7,123,861
7,123,861
50%
1,647,959
1,647,959
71%*
472,989
5,973,670
Technological piping
1,178,157
10,240,577
10,240,577
42%
Water preparation
1,818,429
5,973,670
5,973,670
33%
3,982,447
Electrical networks
Monitoring and testing
equipment
Storage racks
2,345,931
2,345,931
47%
1,251,163
71%
2,438,233
Lift trucks
2,392,598
8,533,814
8,533,814
9,649,117
9,649,117
70%
n/a
2,894,735
See Market Approach
Market approach
In order to gather information on the subject lift trucks, you decided to use Supralift web site
(http://213.198.74.170) containing a lot of secondary-market data, and searched for used EFG 220 trucks
located in Russia. As a result of this research, you have produced the following table containing raw data for
the analysis:
Asset
name
Capacity,
kg
Height
Manufacture date
Price
(excl.VAT)
Currency
EUR /
RUR
Age
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
EFG 220
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
3000
3300
3100
4500
3600
4500
3000
4350
5000
4800
3300
6000
3000
3600
5000
4350
5750
4500
3000
2001
2002
2002
2004
2004
2004
2004
2005
2005
2005
2005
2005
2005
2005
2006
2006
2008
2008
2010
460,660
12,300
12,300
16,700
14,100
15,400
14,100
16,200
17,200
16,200
16,950
18,450
13,900
14,900
18,450
18,450
21,800
21,800
19,653
RUB
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
EURO
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
40.904
10
9
9
7
7
7
7
6
6
6
6
6
6
6
5
5
3
3
1
Price
(excl.VAT),
rubles
460,660
503,117
503,117
683,093
576,744
629,919
576,744
662,642
703,545
662,642
693,319
754,675
568,563
609,467
754,675
754,675
891,703
891,703
803,868
For the purposes our your analysis, you have made the following assumptions: the only key parameter that
drives a lift trucks value is its model and lifting capacity (EFG 220, 2 tonnes), and all other differences in
comparables may be treated as negligeable; there is no apparent outliers in the comparables, so you take all
the data from the table for the analysis. As a next step, you plot the data on a graph (price vs. age) and
select a trend line that fits best.
1,000,000
900,000
800,000
Price (excl.VAT),
rubles
700,000
600,000
Expon. (Price
(excl.VAT), rubles)
500,000
400,000
300,000
200,000
100,000
0
0
10
12
Using derived trend parameters (general equation is y=A*exp(lambda*x), so in our case A=1,095,320.3596
and lambda=-0.07597, and x is Age), we estimate market value for the subject lift trucks. Results are shown
below.
Asset name
EFG 220 #1
EFG 220 #2
EFG 220 #3
EFG 220 #4
Capacity,
kg
2000
2000
2000
2000
Height
3000
3000
3000
3000
Manufacture
date
2006
2007
2008
2009
Age
MV, rubles
2006
2007
2008
2009
6
5
4
3
MV, rubles
(rounded)
659,519
712,451
769,631
831,400
Total market value for the subject lift trucks: 2,973,000 rubles.
External obsolescence considerations
This is one of questions that needs to be investigated further; no adjustments are required within this case
study.
Asset Name
ME_Core
ME_Core
ME_Core
ME_Core
ME_Core
ME_Core
ME_Core
ME_Core
Syrup mixer #1
Syrup mixer #2
Interim storage tank #1
Interim storage tank #2
Interim storage tank #3
Vial filling line #1
Vial filling line #2
Vial filling line #3
Packaging robot
combined with
palletizer
CIP washer
Technological pumps
Technological piping
Water preparation
Electrical networks
Monitoring and testing
equipment
Storage racks
Lift trucks
ME_Core
ME_Core
ME_Support
ME_Support
ME_Support
ME_Support
ME_Support
ME_Support
ME_Support
Gross book
value, as of
reporting
date
7,342,045
5,283,452
4,922,904
5,831,277
3,117,450
8,600,000
12,500,000
11,000,000
Net book
value, as of
reporting
date
4,405,227
0
3,446,033
5,539,713
1,714,598
1,720,000
8,750,000
7,700,000
7,500,000
5,000,000
1,245,000
1,000,000
1,475,003
2,000,000
2,000,000
5,000,000
4,000,000
87,817,131
Date On
Market
Value final
(rounded)
2007
1988
2005
2010
2002
2003
2008
2008
4,856,000
1,388,000
4,557,000
4,816,000
3,141,000
3,960,000
10,263,000
10,263,000
6,750,000
2,500,000
533,571
428,571
1,032,502
1,200,000
2010
2006
2007
2007
2008
2005
6,755,000
3,562,000
473,000
5,974,000
3,982,000
1,251,000
857,143
2,000,000
3,000,000
51,577,358
2007
2005
various
2,438,000
2,895,000
2,973,000
73,547,000