study on valuation of plant and machiery case study

e-ISSN: 2582-5208 International Research Journal of Modernization in Engineering Technology and Science

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Volume:03/Issue:09/September-2021 Impact Factor- 6.752 www.irjmets.com

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[1590]

STUDY ON VALUATION OF PLANT AND MACHIERY – CASE STUDY

Sushmita Shahare*1, Mr. Amol Raundal*2 *1,2School Of Engineering And Technology, Sandip University, Nashik 4, (Ms) India.

ABSTRACT

Valuation is the analytical process of determining the currents worth of an asset or a company. Simply,

valuation is the technique of determining the current market value of the property such as industrial,

residential, etc. Value is determined on basis of its selling price and rent or income it can fetch. This study

covers the methodology verified by the government approved valuer and concerned field expert. The finding of

this study is likely to have important implications in the valuation profession. This study directly introduces

users with actual practice of valuation carried out in the field so that they can compare the theories and actual

methodology. This study will result in stimulating debate and a realization of a need for a theory which

supports a validated process of valuation. The objective of this is to identify the market value of plant and

machinery properties for purpose To Assess the Fair Market Value of 2 Nos.-15 TPH Boilers (Location-Madura

Coats) which is situated in Pune (Maharashtra), India. This study helps owner to know the actual condition of

industry and simplify the finance amount of the property. The valuation of the property helps to know the

actual rate of the property.

Keywords: Methodology, Industrial Property, Field Practice, Valuer, Valuation, Market Value, Finance.

I. INTRODUCTION

The process of estimating value or certain property is called as valuation of a properties like structures, life,

maintenance, location etc. these valuations are done by licensed property valuers or can be done by estate

agents. Before providing a mortgage or refinancing, a lending institution (such as a bank) may request a

valuation to ensure the loan can be covered by the security value of the property. This gives them the

confidence to lend the capital, knowing that if the mortgage goes unpaid, they can recover any outstanding

amount by re-selling the property. A property valuation is typically produced as a report and, in addition to

pictures and plans may contain the following information:

Age of the machine/equipment.

A description of the construction of the industry.

Size of the land and building for the industry.

Utilization of the machine.

Details of fixtures and fittings.

Physical condition, wear and tear, etc.

Details of any issues that need addressing.

Deterioration due to environmental conditions.

Comparative sales in the area.

Use class and extant permissions such as planning permission.

Development plans that might change the value of the property in the future.

Impairment of functional capacity.

Efficiency of the machine.

Power Consumption of the equipment.

Raw Material availability.

In order for the valuation to be as fair and accurate as possible, a property will typically be compared with

other similar properties in the local area. Valuers will examine planning restrictions, by-laws, council zoning,

and so on. Factors such as local infrastructure, reputation and attractiveness of the neighborhood, market

demand, and amenities (e.g. schools, hospitals, greenspaces, and so on), will also be taken into consideration.

http://www.irjmets.com/

https://www.designingbuildings.co.uk/wiki/Mortgage

https://www.designingbuildings.co.uk/wiki/Institution

https://www.designingbuildings.co.uk/wiki/Valuation

https://www.designingbuildings.co.uk/wiki/Loan

https://www.designingbuildings.co.uk/wiki/Security

https://www.designingbuildings.co.uk/wiki/Property

https://www.designingbuildings.co.uk/wiki/Capital

https://www.designingbuildings.co.uk/wiki/Mortgage


https://www.designingbuildings.co.uk/wiki/Report

https://www.designingbuildings.co.uk/wiki/Valuation



https://www.designingbuildings.co.uk/wiki/Area

https://www.designingbuildings.co.uk/wiki/Area

https://www.designingbuildings.co.uk/wiki/Planning

https://www.designingbuildings.co.uk/wiki/Council

https://www.designingbuildings.co.uk/wiki/Infrastructure

https://www.designingbuildings.co.uk/wiki/Amenity

https://www.designingbuildings.co.uk/wiki/School

https://www.designingbuildings.co.uk/wiki/Green_space

https://www.designingbuildings.co.uk/wiki/Green_space

https://www.designingbuildings.co.uk/wiki/Consideration





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Objectives of this Study:

The objective of this study is to identify the current market value of immovable properties for bank finance

purpose.

Valuation is required for loan purposes.

To enquire about the mode of investment of the capital of the concern.

To assess the good will of the concern.

To identify the methodology of valuation work for the complete understanding of field practice.

Professionals can study this information and can research for further improvements

II. METHODOLOGY

There are three recognized approaches to value such as, market, income, and cost approaches. Each has certain

strengths and weaknesses, and their application depends on the purpose, type of property involved, nature of

the market and availability of specific data that a valuer must consider in every project.

A) Market Approach

Value is based on an analysis of market transactions involving similar properties- plant or machine. This

requires an analysis of sale prices and the terms of sales of comparable properties recently sold in the open

market.

a) Direct Sales Comparison Method

This method is the most common in Market Approach for plant and machinery valuation.

The basic fundamental for this method is on the assumption that an informed purchaser would not pay

more for an item than the cost of acquiring an existing one with the same utility.

This method is preferred when valuing plant and machinery for which there is a known and active

secondary market.

In applying it under the ‘in-use’ premise, an allowance then is made to reflect the costs of delivery,

installation, taxes, fees and duties.

Another type of direct sales comparison method is the use of market relationship, also known as percent of

cost method.

b) Comparable Match Method

In this method works on the analysis of similar (but not identical) assets using some measure of utility like

size, capacity, year manufactured, as the basis of comparison.

Difference of this method from direct sales comparison method is that the comparisons may not be similar

in terms of model and year built, but has other similarities such as capacity, brand acceptance in the market

or same country of origin.

Some adjustments have to be made on the comparable before the value of the asset can be derived.

B) Income Approach

The main principle of this approach is that an informed buyer would pay no more for a property or asset than

an amount equal to present worth of anticipated future benefits (income) from the same or equivalent property

with similar risk. The income approach is suitable to be used if the plant and machinery economic life span can

be determined or the terminal value in the end of the useful life is known.

The main restriction in applying the income approach is sometimes the value is overstated. This happens when

an income method is applied to plant and machinery using an earnings stream based on a proportion of the

overall entity. A value using this method includes elements of goodwill and such, is overstated.

a) Direct Methods:

Discounted Future Cash Flow:

It is the most convenient and applicable method in this approach.

Also known as Capitalization of Earning Method.






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This method is applied to investment and general-use properties where there is an established and

identifiable rental market or where a specific measurable stream of benefits may be attributed to the

subject.

In applying this method to plant and machinery, consideration is given to either the income-generating or

the cost savings potential of the item and the associated risks and uncertainties.

b) Indirect Methods:

Market Price Method-

With this, the selling prices of comparable investments are compared to anticipated future benefits to derive

an indication of the implicit rates of return. However, the problem is a general lack of market.

Comparison of Quality Attributes Method

The desirability of the subject is compared to those alternatives having known rates of return.

Build-Up Method

Starts from a known risk-free rate to which factors area added for additional risks, the burdens of

management and the lack of liquidity to derive a suitable rate of return.

The Weighted Average Return on Assets (WARA) Method

This method is based on assumption that a business is a portfolio of financial, physical and intangible assets.

The fair value of the long-term debt plus that of the equity is equal to the sum of the fair values of net

working capital and fixed and intangible assets. WARA is the rate of return each category weighted by its

fair value.

C) Cost Approach

This approach is based on the principle of substitution i.e. no prudent investor would pay anything more for a

property than it would cost to produce a substitute with similar utility as the subject.

a) Replacement new cost method:

The cost to reproduce or replace the subject with the new asset, either identical (reproduction) or having

same utility (replacement), generates the highest amount a prudent investor is likely to pay for new and

unused property.

Trending Method

The application of this method presumes that the current value of plant and equipment may be obtained

from the original (historic) acquisition cost, which typically is recorded in the entity’s records, through

adjusting (multiplying) it by an appropriate price index.

The trending method is suitable for large amount of assets in a valuation engagement, where direct pricing

is not practical.

Direct Pricing Method

It is the process of applying current new unit prices to the subject. Typically, they are obtained from current

manufacturers price lists, quotations, and catalogues that provide the recent prices for the object.

In valuation under the ‘in-use’ or ‘in-situ’ area, they have to be increased by transportation and installation

costs.

The only obstacle using this method is the availability of the data.

Benchmarking Technique

In this method the cost of the item is determined from the known prices of equipment with similar

characteristics, utility and functionality.

Some valuers may use 6/10 rules and some may use battery limits and rules of thumbs.

The 6/10 rules applied when the subject is compared with the new similar machine because the differences

in technology and year built, without considering physical depreciation.

In battery limits technique, the subject is benchmarked against the total needed to construct a production

plant.






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III. DEPRECIATION

Depreciation can be defined as loss in service value due to usage of an asset and passage of time. The result of

depreciation is that sooner or later the asset will become useless.

Depreciation is either ‘curable’ defined as “that part of physical deterioration and functional obsolescence

which is economically feasible to rectify”, or ‘incurable’ – “that part of which it is not economically feasible to

deal with” (IVSC, 2010).

The factors that cause depreciation are:

Wear and tear

Obsolescence

Fall in Market Value

Decay

Accidents like fall of a tree

Change in demands

Changes in Arts and fashion

Structural deterioration

Calamity like flood, lightning etc.

Actions of elements of nature like heat, cold, wind etc.

Fig 1: Types of Depreciation

Total depreciation rate = Effective age of property X (1-net salvage value at the end of useful life)

Normal useful life

IV. CASE STUDY

Table 1: Basic Details of Property

VALUATION REPORT

Date 5th Jan 2021

Property Owner Name M/s. Madhura

Property Address

M/s. Thermax Onsite Energy Solutions Ltd, C/o M/s. Madhura

Coats Pvt. Ltd. Old Mumbai- Pune Hwy, wakadewadi,

Shivajinagar, Pune, Maharashtra-411003.

If the asset is under joint Ownership/Co-

ownership, share of each owner Limited Company

Latitude, Longitude 18.5314° N, 73.8446° E

Reference Date 3rd Jan 2021

Valuer XYZ

Valuer Address ----

Types of Depreciation

Physical Depreciation

Dep. Due to Technological Obsolescence.

Dep. Due to Economic Obsolescence.

Dep. Due to Functional Obsolescence.






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Date of Inspection 5th Jan 2021

Valuation State Bank of India

Instructed By Shivajinagar, Pune Branch

Purpose of Valuation To Assess the Fair Market Value of 2 Nos.- 15 TPH Boilers

Brief Description

This Industry is Located in the well-known area of Pune i.e.

Shivajinagar.

It is Near Highway.

Age of Company 12 years

Table 2: Valuation of Plant and Machinery (2 Nos.-15 Tph Boilers)

Sr.

No.

Description of M/C Qty. Present day

Replacement

value of

identical M/C

Age of

M/C

Future

expected

life

Assessed fair Market

Value As on 5th Jan

2021

(Rs.) (Yrs.) (Yrs.) (Rs.)

Thermax-Biomass (Agro-waste) Steam Boiler

having Technical Specification and various

Auxiliary Equipment/Accessories detailed as under:

Capacity: 15 Tons/Hr

Operating Steam Pressure: 14 Bar






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1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

1.10

1.11

Main Boiler:

Pressure Part Assembly-

comprising of Boiler

Shell, seamless water

tubes & steel supporting

structure (with

insulation cladding)

Reciprocating Grate

Combustion Air & Flue

Gas Ducting

Damper & Expansion

joint

Deaerated Head and

Dosing System

Steam Header & Feed

Water Tank (Tank-glass

wool insulated)

Membrane Panel

Assembly (To form the

water wall at

bottom/sides of Boiler

combustion chamber)

Primary & Secondary Air

Ducting &

Blow down Transfer

Pump

Riser & Down comer

Assembly Blow Down

& Feed Pipe

Furnace Structure-

Refractory lined

Bed Ash Handling

System

Make: Crompton

Greaves

2

2

2

2

1

1

2

2

2

2

1

1,25,00,000

1,35,00,000

20,00,000

8,00,000

4,00,000

12,50,000

52,00,000

28,00,000

30,00,000

48,00,000

28,00,000

6

6

6

6

6

6

6

6

6

6

6

9

9

9

9

9

9

9

6

9

9

6

80,00,000

86,40,000

12,80,000

5,12,000

2,56,000

8,00,000

33,28,000

15,40,000

19,20,000

30,72,000

15,40,000






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Auxiliary Equipment/Accessories:

2.

Steel Fabricated

Chimney-Firmly grouted

with foundation bolts on

RCC-Foundation

1

35,00,000

6

6

19,25,000

3

Induced Draft Fan

Assembly

2

16,00,000

6

6

8,80,000

4

Forced & Secondary

Forced Draft Fans

2

(each)

16,00,000

6

6

8,80,000

5

Air Pre-heater

2

30,00,000

6

6

16,50,000

6

Economizer Assembly

2

30,00,000

6

4

13,80,000

7

Electrostatic

Precipitator along with

Electric Transformer &

Control panel.

2

2,50,00,000

6

9

1,60,00,000

8

Feed Water Pump set

with 20 HP Motor

2

26,00,000

6

6

14,30,000

9

Make-up Water Pump

set with 10 HP Motor

1

10,00,000

6

6

5,50,000

10

Pipe lines (Insulated),

Pressure & water

control system

Lot

70,00,000

6

6

38,50,000

11

Set of Gauges,

Instruments & Valves,

steam traps etc.

Lot

1,00,00,000

6

4

46,00,000

12.

Fuel Handling System-

Bucket Elevators

2

1,15,00,000

6

6

63,25,000

Weigh Bridge-50 Ton






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13. Avery make (with RCC

Load-cell pit & Operator

room)

1 18,00,000 6 9 11,52,000

14

Wood Chipper with 150

HP Electric Motors

Set of

2

45,00,000

6

6

24,75,000

15

Set of Steel Structure:

1. Steel staging for Feed

water Tank

Lot

5,50,000

6

14

4,00,000

16

Misc. Spares for

Boiler/Accessories

Lot

2,50,000

6

4

1,15,000

ELECTRICALS:

17

Power Distribution

Panel & MCC-assembly

1

60,00,000

6

9

38,40,000

18

a) Electric Control

Panels, Switches

b) Electric Cabling

Less, Obsolescence

Factor** @ 7.5%- on

Rs.7,29,30,000/

(Not considered item Sr.

Nos.- 10, 11, 15, 16 and

18b)

OBSOLESCENCE

FACTOR**

With the rapid

technological

development

Modern day Machines

with advanced Features

and latest design are

more precise, faster in

production, economical

in working, less labour

2

Lot

55,00,000

50,00,000

6

6

9

9

Total:

Sub-Total:

Say,

35,20,000

32,00,000

Rs.8,50,60.000

(-) Rs.54,69,750

Rs.7,95,90,250

Rs.7,96,00,000






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oriented and more

reliable.

As such, an

Obsolescence factor of

7.5% has been adopted

to arrive at the fair

Assessed Value.

BOILER SHED & RAW MATERIAL SHED

19

Boiler Shed:

Pressed corrugated steel

sheet roofing over steel

purlins/rafters and

supported over heavy-

duty steel columns; iron-

mesh steel flooring,

access steel ladders,

steel railings, sides

covered with steel

corrugated sheets,

complete with electric

wiring/fittings

Gr. + 3 floors; Total Ht.-

115 feet

8000

sq. ft

4,00,00,000

6

24

3,28,00,000

20

Raw Material (Fuel)

Shed:

Pressed corrugated steel

sheet roofing over steel

purlins/rafters and

supported over heavy-

duty steel columns; plain

cc flooring, sides

covered with steel

corrugated sheets,

complete with electric

wiring/fittings

Gr. floors; Total Ht.- 40

feet

3000

sq. ft

60,00,000

6

24

Sub-Total:

Say,

49,20,000

Rs. 3,77,20,000






[1599]

Rs.3,77,00,000

L Thus, Total

Thus, Total Valuation of Boiler & Boiler/Fuel Shed = Rs. 7.96 Cr + Rs. 3.77 Cr

= Rs.11.73 Crore

Basis of Valuation

1. This refers to assess the Fair Market Value of 2 Nos. 15 Tons/hr. Steam Boiler and the Boiler/ Raw material

sheds owned by M/s. Thermax Onsite Energy Solutions Ltd. Installed and being operated in the Factory

premises of M/s Madhura coats Pvt Ltd. The Boilers are Argo-waste based (i.e. being used as a fuel). As per

the contract, their entire maintenance and operation and even fuel supply is being done by M/s Thermax

and Steam so generated (used for processing by M/s Madura Coats) is charged from the user as per their

mutually agreed price.

Equipments are of reputed ‘Make’ and have been found well maintained and in satisfactory working condition.

2. Column No.4 shows the replacement value of a new and almost identical Machine. This is the price one is

required to incur-if an Equipment having almost identical specification is procured as on date of valuation.

This has been arrived at adding the basic price (as given by supplier/manufacturer with the freight and

transit insurance charges and also includes the installation expenses).

3. Column No.5 shows the age of machine and Col. No.6 in the report shows its future expected Useful working

life-depending on the plant-load duty and the overall condition. As informed, the Boilers operate in all three

shifts. The Estimated Useful life of a Machine/Equipment is the period/duration of time the asset is

productively employed. The Equipment may be operated even beyond the estimated Useful life-which is

known as its “Physical Life”-but only at a heavy maintenance cost, high fuel/energy consumption and

unreliable output because of frequent breakdowns.

4. For calculating depreciation, straight line method of depreciation has been adopted, a suitable and

reasonable usable future expected life of Equipment has been presumed after giving strictly due

consideration to its actual present day overall operating condition, maintenance, extent of wear sustained

owing to the nature of plant duty and the formula used to arrive at the depreciation is as:

٭

Salvage value has been considered as 10% ٭

Total Depreciation = Replacement Value x F






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And, Fair Assessed Value = (Replacement Value - Total Depreciation)

V. RESULTS AND DISCUSSION As a result of thorough inspection, appraisal and analysis and taking into consideration present day

replacement cost of similar machines, their general overall condition, upkeep and other factors such as age,

obsolescence and economy of operation-viz-a-viz latest and new items incorporating improved design/

technique, in my considered opinion, Fair Market Value of the Two Nos. Boilers and the Boiler/Fuel Sheds

under reference as on date works out as Rs 11.73 Crores (Rupee Eleven Crore and Seventy Three Lakhs Only).

VI. CONCLUSION

This project is done for understanding the valuation process of plant and machinery in guidance of Mr. Amol

Raundal my project guide.

This project gives the knowledge of calculating the Fair Market Value of the property.

The assessment of the Fair Market value was carried out at asset level. The aggregate of the individual Fair

Values presented here takes account of the marketing period and the transaction costs of the individual

assets and does not reflect any discounts or premiums on the sales of the whole portfolio or if part of the

portfolio were to be marketed simultaneously or in lots.

The industry under valuation is M/s. Thermax Onsite Energy Solutions Ltd., C/o M/s. Madhura Coats Pvt.

Ltd. Old Mumbai- Pune Hwy, wakadewadi, Shivajinagar, Pune, Maharashtra - 411003.

The age of company is approx. 12 years. The company activity of 2 Nos.15 TPH Steam Boiler & Boiler Shed -

(Being operated in factory premises of-M/s. Madura Coats Pvt. Ltd.).

To Assess the Fair Market Value of 2 Nos.-15 TPH Boilers.

There are no negative values to the report.

VII. REFERENCES

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study on valuation of plant and machiery case study

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