MODULE 2 : METHOD OF

VALUATION FOR PLANT,

MACHINERY AND EQUIPMENT
Speaker : Sr Tuan Haji Ishak Bin Ismail
Managing Director of IM Global Property Consultants Sdn. Bhd.
Purpose of Valuation

 Financing
 Fire Insurance
 Financial Reporting
 Sale and Purchase
 Foreclosure / Auction
 Security Commission
 Market Value
Methods of Valuation

As stated in Standard 15 of VMS 2019, Clause 15.2.26, the Valuer may use any
appropriate approach/method of valuation to value PME and shall disclose the
approach/method used. These three (3) approach/method shall be applied:

 COMPARISON METHOD
 COST METHOD
 INVESTMENT METHOD
COMPARISON METHOD
 Comparison Method

 Comparison method has been considered as the most convenient

method, if the comparison data can easily be obtained by doing some
market research.
 This approach is generally considered the most reliable if adequate
comparable sales exist.
 When there is a limited market indicated by lack of transactions it will
obviously be difficult to determine the value by the market approach.
 Comparison Method

 According to Malaysian Valuation Standards (Valuation of Plant,

Machinery and Equipment), the comparison approach measures the loss
in value from all forms of valuation, depreciation and obsolescence that
are inherent in the individual asset, assuming appropriate adjustments
are made to the comparables to reflect the dissimilarities between them
and the subject asset.
Comparison Elements

• Effective age (remaining economical life) • Motivation of parties

• Condition • Price
• Capacity • Quality
• Features (accessories) • Quantity
• Location • Time of sales
• Manufacturer • Type of sales
• International market
COST METHOD
Cost Method

“Cost approach is the method of estimating the value of the machinery or

equipment, whereby the replacement cost of new equipment or machine are
estimated and with a reduction of various elements of physical deterioration,
functional, technology and economic obsolesces.”
 Cost Method

 Cost method will consist the value of the machinery or equipment withstand on it
considering its physical condition and economic condition.
 The Valuer starts with the current replacement cost of the property being appraised and then
deduct for the loss in value caused by physical deterioration, functional obsolescence and
economic obsolescence.
 The cost approach rests mainly on the principle of substitution, whereby the prudent buyer
will not pay more for a property more for a property than the cost of acquiring a substitute
property of equivalent property. In other word, a willing buyer for a plant and machinery will
pay no more than the price of the plant and machinery of comparable utility.
 Replacement Cost New Approach &
Reproduction Cost New Approach

 Replacement cost new is defined as the current cost of similar new item having the nearest
equivalent utility as the item being appraised.
 Unlike the replacement cost new concept, the Reproduction cost new concept is the cost to
produce the plant and machinery that is exact duplicate of the subject property. It is a replica
of the existing one with the same materials, manufacturing standards, design, quality and
efficiency when put to use.
INVESTMENT METHOD
 Investment Method

 Investment method is frequently used to value a group of asset or individual machinery unit
that are utilized, in aggregate to generate an income stream.
 There are 2 techniques are typically used to value plant, machinery & equipment by the
Income Approach: the direct capitalisation method and the DCF method.
 The direct capitalisation method measures value by dividing a projected income stream in
constant dollars by a capitalisation rate. The DCF method is a form of analysis in which the
quantity, variability, timing and duration of periodic income and the residual value are
projected; the periodic income and the residual value are then discounted to present value
using a discount rate.
 Direct Capitalization Approach

 In using the Income Approach, the Valuer must be able to identify the expected future
benefits (cash inflows) and the magnitude and timing of the future benefits and
expenses associated with achieving the forecasted revenue (cash outflows).
 The discount rate (or capitalisation rate if a multiple-year model is not being used),
the present value of the annual net cash flows, the terminal value of the asset;
calculate the business enterprise value; and develop the appropriate value of the
asset.
 Discounted Cash Flow (DCF) Approach

 This approach also knows as Discount Future Earning Method.

 DCF approach describes a method of valuing a project, company or financial asset using the
concepts of the time value of money.
 This technique will determine all future cash flows and discounted to give them a present
value.
 The discount rate used is generally the appropriate cost of capital. In the other hand the
DCF approach is a method of analysis in which the quantity, variability, timing, duration of
periodic income and residual value are projected and discounted to a present value using
the discount rate.
 Depreciation and Obsolesce Concept

 Depreciation is the reduction in the value of an asset due to usage, passage

of time wear and tear, technological outdating or obsolesces, depletion or
other such factor.
 Depreciation can be defined as the measure of wearing out by consumption
or other reduction in the useful economic life of fixed asset, whether arising
from use, effluxion of time or obsolesces through technological or other
change.
 Depreciation and Obsolesced Concept

 In summary, the depreciation can be define as a loss in value of the plant and machinery due
to various causes or factors generally identified as:

 Physical Deterioration
 Functionality Obsolescence
 Technology Obsolescence
 Economic Obsolescence
 Physical Deterioration

 Physical deterioration is triggered by a few factors that affect the physical condition of the
plant and machinery. Physical deterioration is the loss in value or usefulness of the property
due to the using up or expiration of its useful life causes by wear and tear, deterioration
exposure to various elements, physical stress and similar factor.

 Different type of plant, machinery and equipment will have different rate of deterioration.
For instances, the production machine or equipment will tend to have higher physical
deterioration due to the frequent usage compare to support machine.
Functionality Obsolescence

 The functional obsolescence has to do with the difference in production rates and other
capability characteristic between a new machine and the machine being evaluate.
 Functional obsolescence is also known as decrease in value due to non-availability of spares
or accessories or any other allied factor.
 Nevertheless, the main factor contribute to the functional obsolescence is when a machine is
loss ability of a property to be utilize at high and best use. This happens due to faulty design
or wrong location of industrial undertaking.
 Technology Obsolescence

 Technology obsolescence is due to the different between the design and materials of new
technology of plant and machinery compared with the plant and machinery that under
valuation.
 Latest sophisticated equipment with reduce occupancy, improved efficiency or optimum
energy consumption are common in plant and machinery. Technological obsolescence may
arise out of development of new technology which brings in change in rate of production or
reduction of operating cost.
 Economic Obsolescence

 Economic obsolescence, sometimes called as an external obsolescence. Economic

obsolescence is due to external factors to the machine itself, this could be due to the
economic force such as changes in the optimum use and change in demand of product
manufacture or shrinkage in supply of raw materials.
 Factors Need To Be Considered When Quantifying the Depreciation

 Age estimated economic balance life.

 Value of plant and machinery to decline slowly in the beginning and faster during mid-life and
maximum at the end.
 History of repair and maintenance.
 Rate of yield declining during the remaining life.
 Factor for consideration of willing buyer and willing seller.
Thank you for your attention.
Q&A session