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Philosophy of Plant and Machinery Valuation

Philosophy of Plant and Machinery Valuation

Philosophy of Plant and Machinery Valuation are therms used to refer to installations and support facilities for Manufacturing in an industry designed to perform a pecific pre-determined function, Whether used singly or in combination with other items to enhance the productivity or Operating facility; and includes all devices in ficed or movable form, other than real estate , Deployed in manufacturing, processing or assembling of products from the stage of raw Materials to finished goods.

Philosophy of Plant and Machinery Valuation is very complex in nature as it pertains to industries of Wide spectrum each having plant and machinery with its own inherent characteristics.

Among the issues to be considered in the valuation of plant and machinery are the specific Utility or usefulness of the asset, its contribution to the production of goods and services For which it is designed and deployed. It also covers an estimation in monetary terms the Worth of the plant and machinery in existing use or their contribution to the profitability Of the business after considering the market situation or standard of maintenance.

Types of monetary appraisals are as under :
• Cost estimations
• Forecasts of earning power
• Determination of the present worth

Determination of such worth of the plant and machinery is called valuation. The appraiser who undertakes the work of ascertaining the worth of the properties is known as a valuer. Actually there are three categories of appraisers :
• Cost estimators
• Earning forecasters
• Valuers

In practice, one finds that since there are appraisal functions in all the three fields which are inter-related with one another, a valuer has to acquaint himself adequately with all of them.

Philosophy of Plant and Machinery Valuation or Valuation of plant and machinery is the analysis which is largely qualitative with heavy dependence on the valuer’s judgement. Plant and machinery is owned, possessed, or used as a property for its utility, marketability and/or for earning when in use. In making his judgement, a valuer ought to have a correct appraisal of what a property means and the valuations technique in general. A property for the purposes of valuation may be :
• Land and building;
• Plant and machinery;
• Gems and jewelry;
• Fine arts, antiques, furniture and fixtures etc ;
• Stock or debenture; and
• All incorporeal rights arising out of the above.

Property is rightly defined by Mr. Henry A. Babcock as under :
The word property is given three different meanings in appraisal work :
• The property rights comprised in an ownership;
• The thing, tangible, intangible, or both that is owned;
• A thing, itself, disregarding its ownership;

It is pertinent to point out that in valuation of a thing that is owned, it is the right to the net benefits arising out of its ownership which is being valued.

The basis of the classification of properties for valuation purposes are differences and similarities in :
• Character
• Nature
• Extent of right and benefits
• Privileges

There is a specific valuation method relevant for each of the categories of property. Therefore, properties are categorised in the following manner :

Philosophy of Plant and Machinery Valuation

Investment properties are those that produce net monetary return either in the flow of net income or as a capital gain, or both. Trading enterprises earn dividends from year to year. Real estate generates annual net income by way of rent. Mortgagee earns interest and receives both the principal and interest. The most important characteristic which is common to all of the properties falling under this group is that they are produced, acquired or possessed in the expectation that they will generate anticipated monetary returns to their owners. This category of property is said to have an earning expectancy. Thus, any property which has an earning expectancy is classified as an investment property. [ Philosophy of Plant and Machinery Valuation ]

Few, if any, of the properties in the second group have the characteristic of generating monetary returns to its owner but they yield benefits in the form of use and /or consumption. A single-family residential house is used by the owners till decay; religous property or public schools are used by their owners and ultimately wear out in ruins. Gems and jewelry are put into use by way of consumption and retain an exchange value. The essential and distinguishing characteristic, common to all the properties in this group, is that they are acquired, held or produced with the expectation that they will yield benefits to their owners in the form use and/or consumption, without direct monetary returns. The property having this characteristic is classified as non-investment property. Those are what we called Philosophy of Plant and Machinery Valuation.

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