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CHAPTER ONE
1.0 Introduction
1.1 Background to the study
Plant and machinery are referred to as installations and support facilities for manufacturing in
an industry designed to perform a specific pre-determined function. Whether used singly or in
combination with other items to enhance the productivity or operating facility; and includes
all devices in fixed or movable form, other than real estate, deployed in manufacturing,
processing or assembling of products from the stage of raw materials to finished goods
(Budhbhatti 1999). Valuation of Plant and Machinery is an important and very interesting
area that calls for a lot of serious work, expertise and experience on the part of the Valuer.
But according to IVS (revised 2005) “Plant and machinery collectively constitute a general
class of tangible property asset and this assets have particular characteristics that distinguish
them from the most types of real property and that influence both the approach to and
reporting of their value. In this era of advanced industrialization, where machines are taking
over the majority of production functions previously performed by men, it becomes
imperative that the appraisal of this special category of assets be treated with utmost care.
Ifediora (1999), in his view defined plant and equipment as “Tangible fixed assets of a
business over a long period and are not usually bought with the aim of resale. The task of a
plant and machinery valuer seems challenging when one pauses to reflect upon the immense
variety of plant, machinery and equipment at work in factories especially in the industrialized
1
nations, from the smallest personal computers to ocean going cargo ships, the prospect of
becoming a plant valuer must surely be both challenging and exciting. The purposes for
which the valuation of plant & machinery may be required will include insurance, financial
and market purposes etc. and the enormity and scope of work involve would depend upon the
size of the plant, machinery and equipment in question. It is a common saying in all appraisal
works involving adjustment for depreciation (physical, technological, functional or economic
obsolescence) that the value obtained is as reliable and accurate as the depreciation factor
used in its computation. Hence the valuer’s perception of depreciation and obsolescence
factors and how they affect plant and machinery is crucial.
Traditionally, there are three approaches to value, and these are cost, sales comparison and
income capitalization approaches. However there are instances where a valuer may have to
result into some other methods such as the residual method of valuation as well as the profit
or account method. The cost method seems to be the most widely used due to its suitability
for appraising various types of assets. However, with this method the issue of depreciation
and obsolescence arise and as a matter of fact the cost method is sometimes referred to as the
depreciated replacement cost (DRC) for short. This is not just a mere coincidence of
nomenclature but rather it suggests the inseparable relationship between the cost method and
depreciation factors. It has been observed that there are discrepancies between figures arrived
at by different surveyors on the same asset using the same methods of valuation. These
discrepancies in many cases are significant owing to the difference in the treatment of various
obsolescence factors. Otegbulu (2001) observes that the investment method produces a lower
figure when compared with depreciated replacement cost (DRC) method. He however noted
that the DRC produces a higher figure because the method is not properly applied as only
2
asset condition (physical deterioration) is provided for in the valuation and that provisions
were not made for functional, technological and economic obsolescence where they exist. If a
valuation report on plant and machinery valuation is to provide a credible and reasonable
opinion of value upon which valuable investment and legal decisions may be based, then the
plant and machinery valuer must be ready to go through the rigor of physical inspection of
the subject asset, take full inventory or plant register and more importantly the effect of
physical deterioration and other obsolescence factor must be adequately considered.
The identification and quantification of all forms of obsolescence is a fundamental procedure
in a cost approach to the appraisal of plant, machinery and equipment. While the requirement
for this procedure is rarely disputed, the quantification of obsolescence is often the source of
controversy. In view of this reason, the research work would evaluate the valuers’ perception
of depreciation and obsolescence factors within the context of plant, machinery and
equipment valuation among practicing Estate Surveyors and Valuers in Lagos metropolis.
1.2 Statement of the research problem
Valuation of plant and machinery is the analysis which is largely qualitative with heavy
dependence on the valuer’s judgment (Budhbhatti, 1999); hence it is probably the most
challenging aspect of the valuation profession, especially when there are no market
comparables for the subject asset. Consequently, the valuer results into using the cost
approach which is often subject to the valuer’s understanding of depreciation and
obsolescence in arriving at a reliable market value. The identification and quantification of
physical, functional and economic obsolescence is an important procedure in any cost
approach valuation analysis. Nonetheless, some plant and machinery valuers refuse to
3
recognize economic obsolescence and functional obsolescence as a generally accepted cost
approach allowance. Some valuers assert that a cost less physical deterioration calculation
encompasses all forms of obsolescence. This controversy on the classification and
quantification of obsolescence factors pose a serious problem to the plant and machinery
valuer. This problem requires an evaluation, which is aimed at providing an insight to how
different valuers perceive depreciation and obsolescence, its determination and
quantification, with a view to providing a common ground for its treatment in plant and
machinery valuation, and also to give more credibility and reliability to the value obtained
through the depreciated replacement cost method of valuation.
1.3 Research questions
The research questions will include the following;
How do valuers of plant and machinery perceive depreciation and obsolescence?
What significance do various forms of obsolescence have on plant and machinery
value?
How do valuers see other forms of obsolescence as different from physical
deterioration?
What is the distinction between depreciation and other obsolescence factors in plant
and machinery valuation?
What is the difference between technological obsolescence and functional
obsolescence in plant and machinery valuation?
4
1.40 Aim and objectives of the research
1.41 Aim
The aim of this study is to examine the current level of understanding of depreciation and
obsolescence concept and their adoptions in plant and machinery valuation in the study area.
1.42 Objectives to the aim of the research
The research goal will be achieved through the following objectives:
An evaluation of approaches involved in plant and machinery valuation.
Examination of the concept of depreciation and obsolescence in relation to plant and
machinery valuation
An evaluation of the distinction between depreciation and other obsolescence factors
in plant and machinery valuation.
Examination of the level of valuers understanding of depreciation and obsolescence in
plant and machinery valuation
1.6 Significance of the study
Valuation as a profession is an art and a science. Its validity and reliability depends largely on
the appraiser’s intuition and subjective judgment in accordance with some laid down
procedures. Hence it becomes almost impossible to assume that an opinion of value derived
under such a circumstance will be accepted without further scrutiny. There has been strong
questioning regarding value opinion given by professional estate surveyors and valuers
especially when their computation has to do with depreciation and obsolescence in the
depreciated cost approach (DRC).It is shocking to know that even among practising surveyors
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there is a great divergence of opinion when it comes to the issue of depreciation (physical
deterioration, functional obsolescence, functional and economic obsolescence). For example
in the depreciated cost approach of a building, some argued that depreciation should only be
accounted for after the professional fees have been added to the actual cost of the building,
while others argued that depreciation should have come before the addition of the professional
fee, neglecting the fact that the professional fees are integral part of the overall building cost.
Due to divergence of opinion in perception and understanding of depreciation and various
obsolescence factors in plant and machinery valuation and a need for the promotion of a
proper understanding of same, this study shall strive to explore the various school of thoughts
as regards depreciation and obsolescence in plant and machinery valuation with a view to
bridging the divergence opinion among practicing estate surveyors and valuers as well as
creating a common ground for accounting for obsolescence among academicians and
practioners in the built environment professions.
1.7 Scope of study
The scope of the study is restricted to estate surveyors and valuer practising within the Lagos
metropolis. The study will deal basically with evaluating the valuers’ perception of
depreciation and obsolescence as it concerns plant and machinery valuation. Valuers
understanding on the subject matter will be restricted to areas of plant and machinery alone
and how these factors affect value of plant and machinery. This study shall however be
limited to registered surveyors within the metropolis of Lagos. This research shall also be
collecting data from previous findings on valuers’ perception of various obsolescence factors
and how much relevance is given to each in arriving at a reliable valuation figure. Also data
6
will be collected directly from firms of registered estate surveyors and valuers within the
aforementioned area.
1.8 Limitation of encountered
Constraints to the research study are:
Financial limitations: This includes cost of transportation to the study area, the cost of
getting materials both from the library in form of photocopies and the cost of typing.
Time constraints: A lot of time was involved in the process of gathering data, and lectures
were skipped on several occasions.
Administration problems: Some of the respondents were either indisposed or very
occupied, and could not provide enough of information
1.9 Definition of terms
Plant: an assemblage of asset that may include specialized non permanent building,
machinery and equipment.
Plant and Equipment: assets intended for use on a continuing basis in the activity of
an entity including specialized non permanent building: machinery (individual
machines or collections of machines.
Depreciated Replacement Cost: An application of the cost approach used in the
assessing of specialized asset where direct market evidence is limited or unavailable.
Depreciation: In the context of asset valuation, depreciation refers to the adjustment
made to the cost of reproducing or replacing the asset to reflect physical
7
deterioration, functional obsolescence and economic obsolescence in order to
estimate the value of the asset in a hypothetical exchange in the market where there is
limited or no direct market comparison.
Economic Obsolescence: This refers to the impairment of desirability of useful life
arising from factors external to the property, such as economic forces or
environmental changes which affect supply-demand relationships in the market. Loss
in the use and value of a property arising from the factors of economic obsolescence
is to be distinguished from loss in value from physical deterioration and functional
obsolescence, both of which are inherent in the property. Also referred to as Location
or Environmental Obsolescence.
Functional Obsolescence: A form of depreciation in which the loss in value or
usefulness of the property is caused by inefficiencies or inadequacies of the property
itself, when compared to a more efficient or less costly replacement property that new
technology has developed. Symptoms suggesting the presence of functional
obsolescence are excess operating cost, excess construction, (excess capital cost)
over capacity, inadequacy, lack of utility or similar conditions
Fair Value: An amount for which the asset could exchanged or a liability settled
between knowledgeably willing parties in an arm’s length transaction.
Intrinsic Value: The amount considered on the basis of an evaluation of available
fact to be the “true” or “real” worth of an asset.
8
Machinery: An apparatus using or applying mechanical power, having several parts
each with a definite function, and together performing certain kind of work.
Cost : The amount required to create, produce, or obtain a property
Physical Obsolescence: This is the tear and wear, deterioration arising from age, use
and low level of maintenance leading to a decline in value.
Economic life: The period of steady returns after which it is uneconomical to use a
particular asset
Effective age: An indicative of the condition of utility of an asset. This is usually
limited to physical life or can be a reference to age within an economic life.
9
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
According to IVSC (2004), “Plant and equipment combine to constitute a wide variety of
situations requiring skillful assessment of the utility of the property valued and careful
consideration of such property’s physical, functional, and economic characteristics”. Every
profession has its own challenges and intricacies, and the profession of plant and machinery
valuation is not an exception. Plant and machinery collectively constitute a general class of
tangible property asset IVS (revised 2005) and this assets have particular characteristics that
distinguish them from the most types of real property and that influence both the approach
and reporting of their values.
Budhbhatti (1999) quite supports this notion by reiterating that “plant and machinery fall
under all three categories of property i.e. investment property, marketable non-investment
property and non marketable non-investment property depending on the circumstance of the
ownership. Hence the characteristics of these categories of property should be put into
consideration when valuing plant and machinery. Many plant and machinery valuers find it
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very challenging as it may require the application of several knowledge, ranging from
accounting, engineering, and economics to valuation techniques.
The valuation of plant and machinery should however not be seen as just the valuing of the
physical array of several machines or their intergraded network of pipes, but the estimation of
the interest in plant and machinery and equipment in productive employment, generating
income or with income potential. Ifediora (2004) pointed out that plant and machinery
valuation is not valuing a mass of concrete and steel, or a lump of cast iron or an integrated
network of pipes, rather, it is a valuation of an interest in machinery and equipment in
productive employment, generating income or with income potential.
The valuation of plant and machinery will cover all items of machinery and equipment, trade
fixtures, furniture and equipments used in various industries or business organization. A
valuer of plant and machinery should however be ready to face the brain tasking and
multifaceted discipline of this aspect of valuation. Otegbulu (2006) acknowledge the
challenges faced by valuers of plant and machinery by saying that a competent Plant and
Machinery valuer will always encounter different unique and enjoyable assignments. He must
be very analytical and quick to capture the critical issues in his valuation undertaking. This
requires both technical and economic knowledge of the subject and equipment “. Many a
time the concept of obsolescence seems to be the most widely misunderstood of all the
factors among valuers when valuing plant and machinery. It is so misconstrued that some
even mistake obsolete machinery for obsolescence in machinery.
A successful plant and machinery valuer in the twenty-first century will need more than just
the requisite training in the four corners of our universities to have a sound knowledge of the
practice. Hence exclusive exposure and implied familiarity to Valuation of Plant &
Machinery, masterly knowhow and computerized data bank on modern machinery, their
11
replacement, Production - rating and other intricacies are of outmost importance. Very few
surveyors engage in this aspect of the profession of valuation, for example according to Derry
1990, “There are probably only between 100 and 150 full-time practitioners working in the
United Kingdom which is a remarkably small number compared with the many thousands
engaged in the valuation of commercial and industrial properties”. Be this as it may, even
among the few practicing surveyors of plant and machinery, there still a misconception in the
evaluation of the weight of obsolescence as it affects the profession.
2.1 Overview of plant and machinery valuation
According to Derry, (1990) “When considering the aims and methodology of plant and
machinery valuation, the first question which must be addressed is, quite simply, 'What is
meant by plant and machinery?'. Basically, all tangible assets in commercial or industrial
undertakings will be considered to be plant and machinery with the exception of the land
and buildings and current assets (i.e., stocks, stores, work-in-progress, etc)”. Hence plant and
machinery are fixed assets. Otegbulu, (2001) opined that fixed asset is an accounting and
legal terms which refers to assets which are intended for use on a continuing basis in the
company’s activities and does not refer to physical immobility as the name may suggest, but
could include assets such as ship, motor vehicles, aircraft, railway engines, mobile cranes and
heavy moveable equipment, in addition to other forms of fixed asset like land, building and
installed plant and machinery.
However Budhbhatti, (1999) summarized plant and machinery of an enterprise to include all
devices in fixed or moveable form other than real estate, deployed in manufacturing,
processing or assembly of products from the stage of raw materials to finished goods.
According to IVSC, (2004) “Plant is the assemblage of assets that are inextricably combined
and that may include specialized buildings, machinery, and equipment. The combination of
12
such assets may be achieved by means of integrated support structures; cladding and staging
that are incapable of being separated from the assemblage.Machinery may refer to Individual
machines or collections of machines. IVSC, (2004) further explained that a machine is an
apparatus using or applying mechanical power, having several parts each with a definite
function, and together performing certain kinds of work. Equipments on the other hand are
ancillaries that are used to assist the function of the enterprise/entity. Hence The International
Valuation Standards in 2004 Committee summarized the characteristics of plant and
machinery as tangible assets that:
(a) Are held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes.
(b) Are expected to be used during more than one period.
2.2 Types of plant, machinery and equipment valuation
Plant and machinery may be valued for several reasons. What the content of a plant and
machinery valuation will entail as observed by Derry (1990) will vary according to the
purpose for which the valuation is required. He further found out that ensuring that the exact
content of an appraisal is right is not always given the attention which it deserves and that
errors in establishing the schedule of assets can lead to far greater inaccuracies than mistakes
made later on in the valuation process. A valuation exercise could cover so many types of
assets; however the main types of valuation may usually include the following:
(a) Open market valuation
(b) Financial valuation
(c) Insurance valuation
However the various purposes will include the following according to Budhbhatti (1999):
Insurance
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Financial statements
Bank finance
Lease finance
Liquidation
Take-Over
Merger
Sale/Purchases
Rating
Insolvency etc.
(Otegbulu,2006) and Kuye (2009) said that the value of plant and machinery will be
determined by its output, productivity and utility relative to other asset which are available in
the market at a particular point and place and for a stated purpose . Kuye (2009) however
added that many people regard the new cost of an item as its present value. This he said is not
so. He went further to give a brief relationship between what a willing buyer will pay as price
for a machine in relation to output, productivity and its quality as follows:
Output dependent on the rate and amount a machine can produce i.e. the faster it can
be made to work and the larger the work it can handle, the more expensive it will be.
Productivity is subject of the running cost, hence the lower the its running cost, the
more sought after and more expensive
Quality is a function of the standard and the life span of a machine. The better the
standard of the work it produces and the length of its life, the more expensive.
2.3 Concepts of value in plant and machinery valuation
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Fair market value (removal): This is the estimated amount, expressed in terms of money,
that may reasonably be expected for a property, in an exchange between a willing buyer and a
willing seller, with equity to both, neither under any compulsion to buy or sell and both fully
aware of all relevant facts, as of a specific date, considering the cost of removal of the
property to another location.
Fair market value (in place and in continued use): This is the estimated amount, expressed
in terms of money, that may reasonably be expected for a property in an exchange between a
willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or
sell, and both in Place and are fully aware of all relevant facts, including installation, as of a
specific date and assuming that the Continued Use business earnings support the value
reported. This amount includes all normal direct and indirect costs, such as installation and
other assemblage costs to make the property fully operational.
Fair market value (installed): is the estimated amount, expressed in terms of money, that
may reasonably be expected for an installed property in an exchange between a willing buyer
and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both
fully Installed aware of all relevant facts, including installation, as of a specific date. This
amount includes all normal direct and indirect costs, such as installation and other
assemblage costs, necessary to make the property fully operational.
Orderly liquidation value: is the estimated gross amount, expressed in terms of money that
could be typically realized from a liquidation sale, given a reasonable period of time to find a
buyer or buyers with the seller being compelled to sell.
Forced liquidation value: is the estimated gross amount, expressed in terms of money, that
could typically be realized from a properly advertised and conducted public auction, with the
seller being compelled to sell with a sense of immediacy at a specific date.
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Market value: is the highest price in terms of money which a property will bring in a
competitive and open market under all conditions requisite to a fair sale, the buyer and seller,
each acting prudently, knowledgeably and assuming the price is not affected by undue
stimulus
Liquidation value in place: is the estimated gross amount, expressed in terms of money,
which could typically be realized from a failed facility, assuming that the entire facility
would be sold intact with a limited time to complete the sale as of a specific date.
Salvage value: is the estimated amount expressed in terms of money that may be expected
for the whole property or a component of the whole property that is retired from service for
use elsewhere.
Scrap value: is the estimated amount expressed in terms of money that could be realized for
the property if it were sold for its material content, not for a productive use.
2.4 Purposes of plant and machinery valuation
Qaiser (2000) observed that assets are valued for different purposes e.g. for taxes, balance
sheet, merger and acquisition, etc. They are also valued for the purpose of insurance. He
pointed out that there are various methods of valuation and the choice of an appropriate
valuation method will depend upon the purpose of valuation as also on the nature of assets
involved. Let’s briefly examine the various methods employed for valuation purpose and then
examine the current practices being followed in respect of valuation of assets for the purpose
of insurance.
The various methods used for valuation are as under:
(a) Valuation based on replacement cost basis: Here the cost of a new machine of similar
nature, make and capacity if available is found out. This cost will represent the value on
replacement cost basis.
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(b) Good as new: There are situation where machine / plant is working satisfactorily
because of good maintenance. In such situation, this valuation method is used which
represents the original actual cost less depreciation but adding back the maintenance
cost.
(c) Sum of part valuation: This method of valuation is used where the equipment is not of
composite nature. In this method all the different units / component are valued separately
and then added up to arrive at the composite value. But this method has the inherent risk
of technological process in that if one part is damaged but not available, the entire
assembly becomes scrap. The loss in such situation is not limited to that part only.
(d) Fair value method: This represents the value in exchange. This method of valuation is
applicable to assets that can be currently exchanged in the market for value e.g. whatever
may be the cost of production of LPG, its value in the market for sale in exchange for
cash is the fair value.
(e) Depreciation method:
i. Book Value: This represents the written down value of the assets in the books of
accounts. In this first year, this represents the actual cost of the asset and with each
passing year appropriate depreciation is charged and the value of the asset is accordingly
reduced. Over a period of time, the asset value becomes so low that it will not reflect the
true worth of asset.
ii. Market Value: In this method depreciation is allowed on current replacement value
of the asset for the number of years it has been in use to arrive at market value
2.5 Methods of valuation
Virtually all plants and machinery valuation uses the three basic traditional methods of
valuation in other to arrive at the various values intended by the valuer.
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The three basic or conventional methods of valuation are the following;
(a)The cost approach (DRC)
(b)The market comparison approach
(c)The income approach
The depreciated replacement cost approach (DRC)
IVS (2004) has defined the depreciated replacement cost as ‘the current cost of replacing an
asset with its modern equivalent asset less deduction for physical deterioration and all
relevant forms of obsolescence and optimisation.’ The DRC approach is based on the
economic theory of substitution. Like the other valuation approaches listed above, it
involves comparing the asset being valued with another. However, DRC is normally used in
situations where there is no directly comparable alternative. The comparison therefore has
to be made with a hypothetical substitute, described in IVS GN8 as the modern equivalent
asset. The underlying theory is that the potential buyer in the exchange described in the
Market Value definition would not pay any more to acquire the asset being valued than the
cost of acquiring an equivalent new one. The technique involves assessing all the costs of
providing a modern equivalent asset using pricing at the date of valuation (RICS,
2007).This view is supported by Kwong and Montes Jr (2003) in their view on cost
approach as the cost to reproduce or replace in new condition the assets appraised in
accordance with current market prices for similar assets, with allowance for accrued
depreciation arising from condition, utility, age, wear and tear, or obsolescence present,
taking into consideration past and present maintenance policy and rebuilding history.
The cost approach is based on the concept of replacement or reproduction cost as an
indicator of value. A prudent investor would not be expected to pay more for an item than
the amount for which it could be purchased new. Further, to the extent that a particular item
18
provides less utility than a new one, its value will be less than the cost of a new replacement
or reproduction. To account for this difference, the replacement/reproduction cost new is
adjusted for losses in value due to physical depreciation, functional obsolescence, and
economic obsolescence.
The cost method is also known as the replacement cost method of valuation (Ifediora, 2009).
This has often been regarded as a method of last resort in many valuation exercises and it is
usually employed in the valuation of special assets in which most plant and machinery
belongs. Kuye (2009) however pointed out that the problem associated with the DRC is the
estimation of allowance for depreciation. Sayce and Connellan as cited in Kuye (2009) also
support this opinion by stating that “determination of the appropriate rate of depreciation is
important in the application of the DRC method.
Income approach
Income approach is based on the present value of cash flow that an asset can be
expected to generate during its remaining life. This approach is based on a forecast of the
business income and expenses that the property will generate over a given period of time. It
assumes that the value of the property is dependent on the ability of all the assets to earn a
reasonable return. This approach is best utilized for determining the business enterprise value.
Market approach
Schreiner, (2009) is of the opinion that the most widely used and accepted approach is the
market approach. This approach considers prices recently paid (or currently asked) for
similar items with adjustments made to indicated market prices to reflect certain conditions
of the comparables in contrast to the subject items. This approach is appropriately
employed when valuing assets which are commonly bought and sold in arm's length
transaction, also Appraisal economics inc. is in support of this view and it describes the
market approach to involve a direct comparison of the property being appraised to similar
19
properties that have sold in the same or in a similar market. This approach is based on the
principle of substitution which implies that a prudent person will not pay more to buy a
property than it will cost to buy a comparable substitute property.
2.6 Identification of plant and machinery
The first step in the identification of plant and machinery is to take inventory. Ifediora (1999)
believes that the inspection and survey of plant and machinery should be compiled in an
inventory or schedule which will form the basis of valuation. Hence all items of plant and
machinery must be identified and be properly reported in other to arrive at a sound and
reliable value judgement.
Method of listing is not explicit to a specific industry and this opinion was supported by
Budhbhatti that the order of identification of plant, machinery and equipment can be changed
depending on the requirement of the clients.
He however classified the identification of plant and machinery into the following two
categories:
(a)Micro-identification
(b)Macro-identification
2.6.1 Micro-Identification
This deals with the precise description of a particular machine such that its details distinguish
it from other similar machines. Hence it concerns itself with listing a single machine
Budhbhatti recommends the following procedure in the micro-identification:
Ingredients of description
Client’s asset no./identification No., if available
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Description
Model
Type
Size or capacity, if measured or given
Serial number, if found
Name of manufacturer
Name of supplier when known
Details of attachment, accessories and components, i.e. chucks, collets. Tooling etc.
for the machine
Reference to any special foundations, servicing connections like wiring controls,
piping installations, as the case may be, if using an installed concept of value.
Modifications or renovations from standard.
A typical inventory of plant and machinery will look as bellow:
S/NO DESCRIPTION QTY IDENTIFICATION DATE OF
PURCHASE
DEPRECIATION
FACTOR
DRC REMARK
Source: property valuation technique by Olusegun Kuye, (2009).
Macro Identification: This is a method of studying the entire manufacturing process by
identifying major components contributing to the design capacity of the plant. The valuer
must identify and confirm the state of each item of machinery and equipment a manner that is
logical. The appraiser uses macro identification to identify the following:
What the plant manufactures and produces
How the plant is manufactures
What the capacity of the plant is
21
Source: Alico, 1986
A list of information to be considered when gathering data for macro identification of
machinery and equipment is as follows:
Product produced with each name and description
Plant/ process by-product amount and uses
Plant and/ or unit capacity per day, tons per day, annual production etc
Plant capacities: design capacity, rated and actual consistent capacity.
Operating mode, (days, month) if not identified in capacity
Outlet for finished or intermediate product
Available historical operational data over three to five years
Fuel and power consumption by unit
Operating staff per unit: type of control systems and if it is centralised
Estimated maintenance budget over last three to five years and projected upcoming
budget if plant is operational
General condition of plant and components
2.7 Concept of depreciation and obsolescence
Otegbulu (2008) describes depreciation has a loss not restored by current maintenance due
to all factors causing ultimate retirement of an asset, such as wear and tear, decay,
inadequacy, and obsolescence. Depreciation, for appraisal purposes, is a loss in value from
any cause. It is the difference between the value of a hypothetical new, similar property and
the current value of the subject property; the total measure of the reduced value at a
particular point in time. It is a by-product of the value estimate. Saskatchewan Assessment
Management Agency SAMA (2006) agrees with this view by saying that depreciation is a
22
loss in utility and hence value from any cause. Similarly, accrued depreciation is defined
as: a loss in value from the reproduction or replacement cost of an improvement due to any
cause as of the date of the appraisal. It may also be defined as the difference between the
reproduction or replacement costs of an improvement and its market value as of the date of
appraisal. It however pointed out that there are several definitions of depreciation but more
often than not more related to accounting than real estate appraisal.
The concept of depreciation without doubt is cardinal in the use of the depreciated
replacement cost method which is perhaps the most widely adopted method in many plant
and machinery valuation. Webster’s Third New International Dictionary (unabridged 1961 as
quoted in Budhbhatti 1999) defines obsolescence as “ a factor included in depreciation to
cover decline in value of assets due to invention of new and better processes or machine,
changes in demand, in design or in the art, and other technical or legal changes, but do not
cover physical depreciation. In 2001, Otegbulu explains depreciation as a premium that must
be paid by any asset whether in use or not in use. He went further to associate it with loss in
value of the asset. However it is important to know the difference between depreciation and
obsolescence as the latter is the reduction in value from factors such as change in technology,
economic or functional capacity exogenous to the asset (Otegbulu). Depreciation can also
connote the cost of operation or physical condition which results to a loss from upper limit of
value (Alico, 1968).
Otegbulu (2001, 2006) defines depreciation as loss not restored by current maintenance due
to all factors causing ultimate retirement of an asset, such as wear and tear, decay, inadequacy
and obsolescence. It is clear from the above literatures that depreciation involves a loss in
value of an asset and that obsolescence does not equal to depreciation. It can also be said that
obsolescence is a type of depreciation allowance or one of the factors responsible for the loss
23
in value of an asset. Budhbhatti (1999:105) identifies three categories of obsolescence as
follows:
Technological
Functional
Economic
Otegbulu (2008) quite agrees with Budhbhatti by identifying obsolescence as technological,
functional, and economic in nature.
However IVSC, (2007) tends to replace obsolescence for depreciation allowance and in their
own classification, they identify the following three principal types of depreciation allowance
or obsolescence to include:
Physical deterioration
Functional obsolescence
Economic obsolescence
Technological obsolescence
Ifediorra (2009) however pointed out that the principal causes of depreciation are physical
deterioration, functional obsolescence and economic obsolescence. He equally identified
that there are three broad approaches to the estimation of depreciation. These three
approaches are
Direct method
Indirect method
Theoretical method
24
Baum (1991) explained depreciation as a loss in the existing use value of a property which he
said can be caused by physical deterioration or by functional obsolescence or aesthetics
obsolescence. While obsolescence is one cause of depreciation such as decline in utility.
From these various points of views, it can be inferred that obsolescence is not depreciation,
and also that obsolescence is only a cause of depreciation. Hence obsolescence can also mean
depreciation factor. According to Wu and Perry (2004), depreciation is the bye-product of
normal wear and tear associated with equipment use, as well as obsolescence and natural
deterioration while SAMA (2006) is of the opinion that the amount of depreciation charged
should correspond to the loss in value of the asset over time. This in their opinion goes on to
utilize the three commonly accepted depreciation method which are namely:
Straight line method
Sum of year digit method
Declining balance method
Budhbhatti (1999) also cited the opinion of TGOVOFA and TGOVOA on depreciation as the
measure of wearing out consumption or other permanent loss of value of fixed asset whether
arising from use, effluxion of time or obsolescence through technology and market changes.
From this explanation, one can also see that obsolescence is just one of the causes of
depreciation and depreciation itself.
Physical deterioration
IVSC (2007) explains physical deterioration as wear and tear over the years and this they say
may be combined with lack of maintenance. The physical condition of an asset can be a
subject of different opinion (Alico 1968). This state is supported because many valuers
estimate the remaining useful life of an asset based on the observed condition, once the gross
value of the asset has been established by whichever method most appropriate, the valuer
25
depreciates this figure in other to arrive at the existing use value. There is however a need to
use a uniform basis of depreciation so that value judgments of valuers would be appropriate
of each other. Consequently Alico, (1989) suggested a reference table to be utilized as a
general basis for relating depreciation condition and remaining useful life. IVSC (2003) is of
the opinion that physical deterioration of the asset is to be viewed not in absolute terms, but
within context owing to the fact that in some markets and for some types of asset, a degree of
physical deterioration will not adversely affect the value; in other cases it will. It would be
inappropriate to determine the effect of physical deterioration on value depreciation only in
purely mechanistic terms.
Functional obsolescence
According to Budhbhatti, functional obsolescence arises when a machine already in function
loses its optimum capacity owing to a decline in co-operation from its operating counterparts.
He believes that this may be due to varieties of internal reasons. He also added that functional
obsolescence may arise due to faulty design or wrong location of industrial undertaking. This
may ultimately result into a decrease in value due to non-availability of spare parts or
accessories, or any other allied factors. IVSC, (2004) is of the take that functional
obsolescence arises where the design or specification of the asset no longer fulfils the
function for which it was originally designed. It added that in some cases functional
obsolescence is absolute, i.e. the asset is no longer fit for purpose.
Otegbulu, (2008) seem to be in support of this position by saying that any utilization of a
machine which is less than its highest and best use represents a loss from upper limit of value.
Hence this qualifies as functional obsolescence. In other cases the asset will still be capable
of use but at a lower level of efficiency than the modern equivalent, or may be capable of
modification to bring it up to a current specification. It is believed that the depreciation
26
adjustment will reflect either the cost of upgrading, or if this is not possible, the financial
consequences of the reduced efficiency compared with the modern equivalent. Other factors
that may be contributory to functional obsolescence are change in technology or legislation.
For example in the industrial sector where an existing plant may be incapable of meeting
current environmental regulations or in some cases the product it was built to produce is now
illegal (RICS 2007).
Alico (1968) views functional obsolescence from the perspective that it is the difference in
production rates and other capability characteristics between a new machine and the machine
being evaluated. Hence it arises when a machine already in use loses its optimum capacity
owing to a decline in interdependency from its operating counterparts. This view apparently
agrees with that of Budhbhatti. However Otegbulu (2001) asserts that the ability of an item of
plant and machinery to be utilized at its highest and best use would have some relationship to
value and any utilization less than its highest and best use represents a loss from upper limit
of value.
Economic obsolescence
This arises from the impact of changing external conditions on the demand for goods or
services produced by the asset. However, care has to be taken to distinguish these factors,
which are due to external factors, from factors that are specific to the entity (IVSC 2007).
Ifediora as cited in Otegbulu (2001) listed causes of economic obsolescence to include:
Neighbourhood hazard and nuisance
Heavy traffic flow
Smoke
Dust
Offensive odours, or intrusion of incompatible uses
Decreasing demand etc27
SBE (2009) supports this view and defines economic obsolescence, also known as external
obsolescence, as a loss in value resulting from adverse factors external to the property that
decrease the desirability of the property. It also added that this type of depreciation may
include the loss of value due to:
Inflation
High interest rates
Legislation
Environmental factors
Reduced demand for the product a
Increased competition
Changes in raw material supplies
Increasing costs of raw materials, labour or utilities without a corresponding price
increase of the product
It also added that loss in value attributable to economic obsolescence is usually beyond the
owner's control and is mostly atypical depreciation. It can, however, be normal in industries
where markets have shown long-term sustained and predictable shifts, such as the market for
semiconductor and other high-technology equipment. It can be identified by studying the
overall market conditions for a property. For example, if the output of a machine is
superseded in the marketplace by output of a different material (for examples, fibreglass for
metal or plastic for wood) and the market no longer absorbs the superseded output, then the
machinery has suffered economic obsolescence.
28
Remsha (2010) is quite in support of the opinion that economic obsolescence arises from
factors exogenous to the asset in question, hence the name external obsolescence.
29
CHAPTER THREE
RESEARCH METHOD
3.0 Introduction:
The purpose of this chapter is to examine various statistical approaches that have been
explored in previous studies with a view to formulating an appropriate methodological
framework that will ensure the achievement of the study aim and objectives.
There is no single scientific method that applies to analytical studies; it is argued that the
choice made is driven by the research questions being answered (Asika1991). Put differently,
the method of any research endeavor is normally dictated by the purpose of the research and
the kind of problem that needs to be addressed.
Therefore, this chapter is divided into stages, which includes; examination of the study
problem, description of tools required for investigation, including questionnaire and
collection format.
3.1 The study population:
Adamu-Iria (2006) defined population as the collection, or set of individuals or objects whose
properties are to be analysed. Hence the population for the study comprised of registered
estate surveyors and valuers within Lagos metropolis (Lagos Island and Lagos Mainland
Local Government Area).
According to decree no.24 of 1975, estate surveyors and valuers are statutorily empowered to
carry out valuation for all purposes and this includes plant and machinery valuation. Hence,
this work basically involves the study of valuers’ perception and understanding of
depreciation and obsolescence in relation to plant and machinery valuation.
3.2 Sample Frame:
A sample frame was provided for the study so as to provide a comprehensive list for
identifying each member of the population. All registered estate firms in Lagos metropolis
30
were listed and adopted as the sample frame for the study. A major consideration for the
design of this sample frame is the financial costs involved in achieving considerable
coverage. Consequently, a decision is made to restrict the respondents to a manageable size
without compromising the study depth or width. The sample size was eventually chosen as a
rule of thumb by the project supervisor and consequently 60 estate firms were selected from
about 105 on the current list of members of NIESV in the study area. A random sampling
technique was used to select two surveyors in every valuation department of selected estate
firms and as such all surveyors had equal chance of being selected based on their availability
at the point of distribution.
3.3 Sampling Size:
Fifty seven percent (57%) of the total Real estate firm in the study areas were sampled. This
implies that the total number of respondents sampled were sixty (60). This study assumed that
the above sample size will help to assess objectively the perception of valuers on depreciation
and obsolescence in plant and machinery valuation in the study area.
3.4 Sampling Technique:
For this study, the simple random sampling technique was adopted in determining the size of
estate surveyors and valuers to be interviewed as the study sample. The procedure for simple
random selection goes thus: A list of estate firms in Lagos metropolis was drawn and an
unbiased random selection was done to determine the exact respondents that will form the
57% respondents for the study. This method afforded this study the opportunity to minimize
researchers influence (i.e. bias) as the selection process for selecting the respondents is not
under the control of the researcher.
3.5 Data Collection Method:
Approach adopted for conducting research depends on the nature of investigation and the
type of data or information required and available. Naoum (1998) identified various data
collection techniques available for eliciting data and information from respondent. They are
personal observation, in-depth interviews, mail questionnaire, self-administered questionnaire
and telephone survey.
This study administered questionnaire on all the study respondents i.e. (Estate surveyors and
valuers) and collected them at the appointed time. However, this method among others
ensures wider coverage, high response rate and reasonable level of accuracy (since adequate
time is given to respondent to answer the questions). However, because of the possible
31
quality of experience and exposure of estate surveyors and valuers, this study will explore the
opportunity unstructured or informal interview where possible so as to ensure adequate data
collection and improve the overall quality of data collected.
(a) Questionnaire
The design of the questionnaire is structured to elicit response from respondents regarding
how they perceive depreciation and obsolescence when they carry out plant and machinery
valuation. It further investigates conformity with standards of valuation and the level of their
understanding of the concepts as it relates to this special class of valuation. These questions
are carefully constructed to supply information for the study.
Multi-choice question: to provide various options to extract respondent’s perception
of the problem.
Scaled question: to extract the intensity of the respondent’s feelings/perception
Counter check questions: to find out if the respondents are giving the correct
responses, invariably the validity of the data is being checked.
Munasingbe (1993:89) and FAO (2000:10) are of the opinion that a standard questionnaire
opens up with a general “warm up “questions aimed at making respondents comfortable with
their participation in the survey. This is followed by three sections namely:
(a.) Firms/ surveyors details: this inquires about the respondent’s background, and
description of service rendered and the frequency of their engagement.
(b.) Surveyors’ approach to valuation and problems encountered: this section critically
examines the various methods which valuers adopt when carrying out plant and
machinery valuation. It also endeavors to find out which of the methods are the most
adopted and also explores the reasons for using such methods. It went further to
hammer on how valuers perceive depreciation and obsolescence and to what degree are
they accounted for in plant and machinery valuation.
(c.) Depreciation and Obsolescence plant and machinery valuation: this section
inquires of the respondent’s knowledge of the concept of depreciation and obsolescence
with regards to plant and machinery valuation. Surveyors’ approaches to the valuation
32
of plant and machinery are extensively inquired into with emphasis on determining
whether each selected valuer knows the distinction between depreciation and various
obsolescence.
(b) Personal Interview
The interview is semi-structured owing to the fact that, there are specific topics related
to the research hypothesis to build the interview on. This way, other issues related to
the research area will be discovered after data analysis. Interview sessions will be held
briefly with respondent surveyors of selected firms and some specific question which
the questionnaire does not covered will be asked in other to further ascertain the
perception of these valuers on the subject matter.
3.6 Questionnaire Design:
To elicit information on the research problems, a single questionnaire was designed to suit
the research objectives. The questionnaire extensively contained close ended questions with a
few open ended ones. The very essence of open- ended question will be to allow respondents
to give detailed answers in cases where their experience cannot be easily articulated into a
few options. However, this was done with utmost care so as not to create problem when
carrying out analysis. Each of the study objectives will be adequately reflected in the
question. This is to ensure that the study is able to draw sufficient information that will assist
in the achievement of the study goal. The beginning aspect of the questionnaires raise general
questions that will assist the researcher in drawing inference. Questions like: Number of
staffs, year of establishment, academic qualifications of respondent and others will be raised.
The next class of questions bothered on achieving the first objective of the study. Questions
that highlighted salient issues on the evaluation of approaches adopted by valuers in plant and
machinery valuation and also an examination of the concept of depreciation and obsolescence
in relation to plant and machinery valuation. Also questions testing valuers’ perception and
understanding of the concept of depreciation and obsolescence were raised. The study also
sought to identify how valuers’ perception affects the methods adopted in their valuation
practices. Other questions contained in the questionnaire includes those which specifically
test valuers’ level of understanding of obsolescence and depreciation.
33
3.7 Method of Data Analysis:
The Statistical Package for the Social Sciences (SPSS) and Excel will be used for data
analysis. Oloyo (2001) noted that statistical analysis of the research result (i.e. data collected)
and their interpretation are important steps in the research process, and they are vital to the
decision that the researcher has to make on completion of the research study. However
analysis of data could range from descriptive analysis which includes: (measure of central
tendency, measure of variability, measure of relationship and measure of relative position
e.tc.). The variables for this study were measured mostly through rating and ranking
procedures which will yield nominal and ordinal quantities. It necessarily follows that the
tools of analysis for this research are basically descriptive statistics like means, deviations,
rank coefficients, and cross – tabulations.
3.8 Reliability and Validity Test:
Whatever research methodology is adopted for the research, reliability and validity issues
have to be considered. Hence reliability of a measure refers to the extent to which a test or
measuring procedure yields the same result when tried repeatedly, that is consistent. It might
be internal or external validity. External reliability is the more common of the two and refers
to the degree of consistency of a measure over time. Validity is the extent to which a measure
is actually in line with what the researcher sets out to measure and the extent to which the
results can be applied to new settings.
As such, this study’s questionnaire was structured to reflect the study’s objectives,
consequent upon which the supervisor carried out comprehensive review (construct validity).
The questionnaire was then exposed through pilot study conducted within the study area to
test for reliability. The pilot study involved 10 respondents, equally cutting across the study
population area.
34
3.8.1 Sources of Data Collection
The data gathered in the conduct of this research is the primary and secondary data.
Primary Data: This was gathered mainly through questionnaire administration, personal
observations and interviews. This research work is an action research and this I think is
necessary in order to be original.
Secondary Data: This was obtained from expert views, facts gathered from intensive reading
of journals, workshop papers, unpublished thesis dissertation, valuation guidelines, textbooks
related to the topic under focus. Consultation was made on-line by way of browsing the
internet which helped in linking up with other foreign universities libraries. The literature re-
view which forms the bulk of this research work is based largely on secondary data.
35
CHAPTER FOUR
4.0 Presentation and analysis of data
This chapter focuses on the analysis and discussion of findings that were obtained from the
data generated through the structured questionnaire and semi structured interview guide
design for the purpose of this study. Data analysis took the form of the ordering of the
quantitative date gathered through the research after investigating the pattern of responses
and association among the data.
The date was prepared before use by way of examining for errors (numeric, transposition and
inappropriate response) without the addition of any subjective information, data used for the
analysis were drawn exclusively from questionnaire administered from which the following
variables were explained.
Table 4.0
CLASSIFICATION DESCRIPTION
Duration Duration of professional practice
Qualification Average academic qualification of
surveyors
Professional affiliation Professional body firm belongs to
Training Rate of attendance of CPDs,
36
Seminars, Workshops etc.
Plant and machinery valuation Rate at which plant and machinery
valuation are carried out
Depreciation and obsolescence Perception and understanding of
depreciation and obsolescence in
plant and machinery valuation
Methods Techniques used in carrying out plant
and machinery valuation
Technical assistance Information gathered from other
professional
Source: Field survey 2010
4.1 Presentation and analysis of descriptive data
Data that are described in this work are presented as follows: The respondents are
practicing estate surveyors recognized by NIESV and registered within the Lagos metropolis.
The number of questionnaire distributed were sixty (60) for the purpose of this study but only
fifty three were returned. This represents a response rate of about eighty eight (88%).
Descriptive statistics of respondents
Table 4.1
37
Source: Field survey 2010
From the
analysis above, it shows that the surveyors practicing for up to 16-20 years have the lowest
percentage(3.8%) of the sample surveyed, followed by those practising for above 20 years
(15.1), and next are those between 1-5 years (20.8%), which immediately follows by those
whose years of practice fall between 6-10 years (26.4%). Those practising between 11-15
years form the highest percentage of respondent. It can then be inferred that there responses
will be borne out of experience.
Table 4.2 Average academic qualification of surveyors
Academic qualification Frequency Percent Cumulative Percent
OND 6 11.3 11.3
HND/BSc. 30 56.6 67.9
MSc./MBA 7 13.2 81.1
B-TECH 10 18.9 100.0
Total 53 100.0
Source: Field survey 2010
38
Professional practice duration
years Frequency Percent Cumulative Percent
1-5 11 20.8 20.8
6-10 14 26.4 47.2
11-15 18 34.0 81.1
16-20 2 3.8 84.9
above 20 8 15.1 100.0
Total 53 100.0
Base on the analysis shown, it is clear that the highest proportion (56.6%) estate surveyors
are either holders of HND or Bsc. Degree or both. Surveyors with B-tech which is a direct
equivalent of the Bsc rank second (18.9%), while holders of Msc. /MBA and OND follow
with 13.2% and 11.3% respectively. The inference that can be drawn from this is that the
average academic qualification in estate firms is HND/Bsc.
Table 4.3 No. Of staffs in firms
No. Of staff
Frequency Percent
Cumulative
Percent
1-5 23 43.4 43.4
6-10 6 11.3 54.7
11-20 13 24.5 79.2
21-30 2 3.8 83.0
31-40 4 7.5 90.6
above 40 5 9.4 100.0
Total 53 100.0
Source; Field survey 2010
Considering the information above, it is conspicuous that the highest percentage of firm has
staff strength that ranges between 1-5 (43.4), this is immediately followed by those with 11-
20 staffs (24.5 %), firms with employee ranging between 6-10 come next with (11.3%), while
those above 40 has a percentage of 9.4%. firms with staff range of between 31-40 came 5 th on
this scale with 7.5% and firms with staff strength of 21-30 have the least percentage of 3.8%.
39
What can be inferred from this is that majority of estate firms have small staff strength which
on the average about 2 or 3 people. This could have effect on the quality of job done
especially when the targets set by firms are far beyond what the man-power can
accommodate.
Table 4.4 no. Of surveyors elected as NIESV member in firms
No. Of surveyors elected as NIESV
member Frequency Percent
Cumulative
Percent
1-5 37 69.8 69.8
6-10 3 5.7 75.5
11-15 1 1.9 77.4
16 and above 1 1.9 79.2
none 10 18.9 98.1
Total 53 100.0
Source: Field survey 2010
The above data shows that the highest percentage of surveyors elected within a single firm is
between one and five (69.8%), this is followed by firms which do not have any of their
surveyors as elected members of NIESV (18.9%). Firms with elected members of between
six to ten represent 5.7% of the respondents while those between eleven to fifteen members
and sixteen and above have a percentage of 1.9%.
Table 4.5 Professional bodies affiliated to by firms
40
Professional bodies Frequency Percent Cumulative Percent
NIESV 28 52.8 52.8
RICS&NIESV 14 26.4 79.2
NIESV&IVSC 5 9.4 88.7
RICS,NIESV&CASLE 3 5.7 94.3
NIESV&REDAN 3 5.7 100.0
Total 53 100.0
Source: Field survey 2010
The analysis above shows that the largest proportion (52.8) of estate firms belong to NIESV
alone, while a sizeable amount (26.4%) belongs to RICS and NIESV. About 9.4% belong to
both NIESV and IVSC. Only 5.7% belong to RICS, NIESV and CASLE. Also another 5.7%
belong to NIESV and REDAN. It can be inferred the above information that the majority of
practising surveyors only aspire to become members of NIESV.
Table 4.6 Frequency of participation in training programme by firms
Participation Frequency Percent Cumulative Percent
often 26 49.1 49.1
very often 11 20.8 69.8
not often 7 13.2 83.0
rarely 9 17.0 100.0
Total 53 100.0
Source: Field survey 2010
41
Out of the fifty three questionnaires retrieved, twenty six respondents which constitute 49.1%
of the total respondent said they attend various development programme often. 20.8% attend
such seminars and activities very often while 7% and 9% do not often and rarely attend
respectively. The inference that be drawn is that the surveyors that attend CPDs and other
development programme often are more than those who do not attend such programme.
Table 4.7 Firms area(s) of specialisation
options
Frequency PercentCumulative Percent
consultancy 2 3.8 3.8
all 25 47.2 50.9
agency&mangement 5 9.4 60.4
agency&consultancy 3 5.7 66.0
agency&valuation 3 5.7 71.7
feasibility&viability studies&valuation
3 5.7 77.4
agency,management,consultancy&valuation
7 13.2 90.6
agency mangement,consultancy and development
1 1.9 92.5
management,feasibility&viability studies&consultancy
1 1.9 94.3
valuation,consultancy&development
3 5.7 100.0
Total 53 100.0
Source: Field survey 2010
From the table above, 47.2% of firms which represents the highest proportion specialises in
all various functions of an estate firm except property development. Those that specialised in
agency, management, consultancy and valuation rank second in terms of figure (13%). Firms
42
which carry out agency and management alone rank 3rd with 9.4%. firms that carry out
agency and consultancy, agency and valuation, Feasibility& viability studies and valuation
and also those which engage majorly in valuation, consultancy and development have equal
share of respondents with 5.7%. The firms that specialised on agency, management,
consultancy and development comprise of 1.9% of the total while those that specialise in
management, feasibility and viability studies and consultancy also have 1.9%. we can infer
from this that majority of the estate firms specialise in all aspect of real estate profession
other than property development.
Table 4.8 Firms that carry out plant and machinery valuation
response Frequency Percent Cumulative Percent
Yes 48 90.6 90.6
No 5 9.4 100.0
Total 53 100.0
Source: Field survey 2010
From the above data it is clear that 90.6% of the respondents’ firm carry out plant and
machinery valuation while only 9.4% do not carry out plant and machinery valuation. Hence
we can infer that majority of the responses that we got on technical issues bordering on
depreciation and obsolescence will be borne more out of practice than what has been taught
in classrooms.
43
Figure 1
Source: Field Survey 2010
Out of the 53 respondents which were retrieved, only 46 gave their responses on this
question and those who have carried out P&M valuation between 1-5 times this year form the
major proportion (47.8%) of our respondents. Those who have carried out the exercise more
than 5 times this year is (28.3) while 13.0% have not carried out P&M valuation this year at
all. It can be inferred from this statistics that P&M valuation is not a engagement that comes
very often and that most estate firms may not carry out P&M valuation for more than e times
throughout the whole year.
44
Table 4.9 Frequency of use of cost method in plant and machinery valuation
options Frequency Percent Cumulative Percent
frequently 42 80.8 80.8
Rarely
Not used
10
0
19.2 100.0
Total 52 100.0
Source: Field survey 2010
From the above statistics 80.8% of the respondents use cost method of valuation frequently in
P&M valuation and only 19.2% use it rarely. However there is none who doesn’t use cost
method of valuation. What can be inferred from this is that cost method is the most used by
valuers when carrying plant and machinery valuation.
45
Table 4.9.1 Frequency of use of the investment method in P&M valuation
options
Frequency Percent
Cumulative
Percent
frequently 15 30.0 30.0
rarely 30 60.0 90.0
not used 5 10.0 100.0
Total 50 100.0
Source: Field survey 2010
46
Only 50 people out of the 53 questionnaires collected gave their responses on this question.
30% of our respondent use the investment method of valuation frequently in their P&M
valuation, 60% said they use it rarely while 10% do not use the investment method at all in
their P&M valuation. Hence an inference can be drawn here that investment method of
valuation is rarely used in P%M valuation.
Table 4.92 Frequency of use of the direct comparison method
options
Frequency Percent
Cumulative
Percent
frequently 29 59.2 59.2
rarely 18 36.7 95.9
not used 2 4.1 100.0
Total 49 100.0
Source: Field survey 2010
49 respondents out of the possible 53 gave their opinion on the frequency of use of the direct
comparison method. 59.2% use the method frequently in relation to P&M valuation, 36.7%
47
use it rarely while only 4.1% do not use it at all. It can then be suspected that the direct
comparison is also frequently used in the valuation of plant and machinery.
Table 4.93 Frequency of use of the profit test method
options
Frequency Percent
Cumulative
Percent
frequently 4 8.3 8.3
rarely 13 27.1 35.4
not used 31 64.6 100.0
Total 48 100.0
Source: Field survey 2010
48
Out of 48 respondents who gave their opinion, only 8.3% use the profit method frequently,
27.1% would rarely use the method while 64.6% would not use the method. It can then be
inferred that the profit method is majorly not used by valuers when carrying out plant and
machinery valuation exercise.
Table 4.94 Frequency of use of indexation method
options
Frequency Percent
Cumulative
Percent
frequently 11 25.0 25.0
rarely 17 38.6 63.6
not used 16 36.4 100.0
Total 44 100.0
Source: Field survey 201049
From the above table 25% of respondents use indexation method frequently, 38.6% use it
rarely and 36.4% do not use the method at all. It can then be inferred that the indexation
method is rarely used in P&M valuation by surveyors.
Table 4.95 Methods most suitable for plant and machinery valuation
50
options
Frequency Percent
Cumulative
Percent
cost method 32 60.4 60.4
direct comparison 16 30.2 90.6
scrap/salvage value
analysis
3 5.7 96.2
income approach 1 1.9 98.1
Profit method 1 1.9 100.0
Total 53 100.0
Source: Field survey 2010
From the above data, the cost method has 60.4%, the direct comparison method has a 30.2%,
scrap/salvage value analysis has 5.7%, while income& profit method shares the same
percentages of 1.9% each. Hence it can be inferred that the cost method is the most suitable
for the valuation of plant and machinery.
Table 4.96 Reason(s) for the suitability of use of methods
51
options
Frequency Percent
Cumulative
Percent
logicality 9 17.0 17.0
transparency 12 22.6 39.6
objectivity 4 7.5 47.2
convenience 9 17.0 64.2
logicality&objectivity 5 9.4 73.6
transparency&convenie
nce
4 7.5 81.1
logicality,transparency
&objectivity
5 9.4 90.6
logicality,transparency
&convenience
5 9.4 100.0
Total 53 100.0
52
From the above data respondents who think logicality is the reason for the choice of method
constitute 17.0 of the whole sample. Those who think transparency is the reason for the
choice of method constitute 22.6%.where as those whose choice of method is triggered by
objectivity of the method in question constitute7.5%. Convenience as a reason for the choice
of method is 17% while other reasons like logicality&objectivity, transparency&convenience,
logicality,transparency&objectivity, and logicality,transparency&convenience are 9.4, 7.5%,
9.4%, 9.4% respectively. It can then be inferred that transparency of method is the major
reason for the choice of valuation method in P&M valuation.
Table 4.97 Awareness on the concept of depreciation and obsolescence
options
Frequency Percent Valid Percent
Cumulative
Percent
yes 53 100.0 100.0 100.0
All responds are quite aware of the concept of depreciation and obsolescence and as a result a
percentage 100 is given here. It can thus be inferred that the perception of the respondent
would represent that of a knowledgeable man with regards to depreciation and obsolescence
in plant and machinery valuation.
53
Figure 4.2: The degree of importance of wear and tear in plant and machinery
valuation
The diagram above represents the importance attached to wear and tear by valuers in P&M
valuation. About 80% of respondent valuers see the issue of wear and tear very important
and even the remaining 20% see it as important. It can then be inferred that all valuers see the
issue of tear and wear in P&M valuation as very important.
54
Figure 4.3 degree of importance of physical deterioration in P&M valuation
The diagram above represents the importance attached to wear and tear by valuers in P&M
valuation. About 60% of respondent valuers see the issue of physical deterioration very
important and the remaining 40% see it as important. This connotes that the issue of physical
deterioration is very important in P&M valuation.
55
Figure 4.4
From the above analysis above 30% of respondents see functional obsolescence as very
important, however 62% see it as just important while the remaining 8% see it as not
important. Then it can be inferred that majority of surveyors perceive functional obsolescence
as important and not very important in their valuation.
56
Figure 4.5
The figure above gives the diagrammatic representation of valuers perception in the
study area on economic obsolescence .only 20.8% opined that economic obsolescence
is very important,5.7% only see it as important. The highest proportion of respondent
don’t see the consideration of economic obsolescence in P&M valuation as important.
It can however be inferred that majority of valuers do not consider economic
obsolescence as important in their valuation.
57
Table 4.9.8 Degree of importance of technological obsolescence in P&M valuation
options
Frequency Percent
Cumulative
Percent
very
important
15 30.0 30.0
important 31 62.0 92.0
i don't know 4 8.0 100.0
Total 50 100.0
From the above statistics we can see that 15% of valuers see technological obsolescence as
very important, 31% see it as important while 4% do not know whether it is important or not.
It can however be inferred that the majority of surveyors admit the importance of
technological obsolescence in P&M valuation.
58
Table 4.9.9 Perception of valuers on the importance of the determination of
depreciation in P&M valuation
options
Frequency Percent
Cumulative
Percent
very
important
29 54.7 54.7
important 18 34.0 88.7
not important 6 11.3 100.0
Total 53 100.0
From the above table it is obvious that 54.7% of the respondents perceive the determination
of depreciation as very important, 34% see this as important while 11.3% see as not
important. Hence it can be inferred that more than half of the total population of surveyors
perceive the determination of depreciation in P&M valuation very important.
59
Figure 4.6
From the figure above statistics 60.4% of respondent perceive that the assessment of
obsolescence is a very important issue in plant and machinery valuation, 24.5% opined that it
is important, while 9.4% perceive that the assessment of obsolescence is not important. Very
few percentage of 5.7% don’t know the importance of the assessment of the level of
obsolescence when carrying out plant and machinery valuation. It can thus be inferred that
valuers perceive the determination of obsolescence as very important when carrying out
P&M valuation.
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Table 4.9.9.1 Perception of valuer on the reliability of methods adopted in P&M
valuation
options
Frequency Percent
Cumulative
Percent
very
important
17 32.1 32.1
important 33 62.3 94.3
not important 3 5.7 100.0
Total 53 100.0
The above table shows that 32.1% of the respondents perceive the reliability of methods
adopted in P&M valuation as very important, 62.3% see it as important while 5.7% opined
that it is not important. Hence it can be inferred that majority of valuers perceive the
reliability of methods adopted as important.
61
Table 4.9.9.2 Degree of importance of valuer’s judgments
options
Frequency Percent
Cumulative
Percent
very
important
35 66.0 66.0
important 18 34.0 100.0
Total 53 100.0
From the above statistics we can see that 66% of respondents perceive the valuer’s judgment
as a very important factor in P&M valuation. Another 34% perceive this issue as important.
It can then be inferred that surveyors perceive the valuer’s judgment as a very important
factor in P&M valuation.
Table 4.9.9.3 Perception of valuers on the degree of importance of information given by the client
in P&M valuation
Frequency Percent
Cumulative
Percent
very
important
14 26.4 26.4
important 26 49.1 75.5
not important 10 18.9 94.3
i don't know 3 5.7 100.0
Total 53 100.0
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From the above statistics 26.4% of respondent perceive that the information given by client
is very important in P&M valuation, 49.1% opined that it is important, while 18.9% perceive
that this is not important. It can thus be inferred that valuers perceive the information given
by their client as important when carrying out P&M valuation.
Table 4.9.9.4 Respondents’ opinion on whether depreciation is a loss of value due to
wear and tear only
options
Frequency Percent
Cumulative
Percent
strongly agree 14 26.4 26.4
agree 5 9.4 35.8
disagree 16 30.2 66.0
strongly disagree 18 34.0 100.0
Total 53 100.0
The above table shows the percentages of respondents expressing their opinion on whether
depreciation is a loss of value due to wear and tear only. 26.4% of respondents strongly
agree, another 9.4% agree that it is while 34% strongly disagree. It can however be inferred
that more than half of the sampled respondent think that depreciation is a loss of value due to
wear and tear only.
Table 4.9.9.5 Respondents’ opinion on whether obsolescence is simply a condition of physical
deterioration
63
options
Frequency Percent
Cumulative
Percent
strongly agree 6 11.3 11.3
agree 8 15.1 26.4
disagree 26 49.1 75.5
strongly disagree 12 22.6 98.1
undecided 1 1.9 100.0
Total 53 100.0
The above table shows the percentages of respondents expressing their opinion on whether
obsolescence is simply a condition of physical deterioration. 11.3% of respondents strongly
agree, another 15.1% agree that it is while 49.1% disagree. Another proportion of 22.6%
strongly disagree while 1.9% of the respondent was undecided. It can however be inferred
that majority of valuers disagree that obsolescence is simply a condition of physical
deterioration.
4.9.9.6 Respondents’ opinion on whether obsolescence is much more than physical
deterioration
64
Frequency Percent
Cumulative
Percent
strongly agree 29 54.7 54.7
agree 22 41.5 96.2
disagree 1 1.9 98.1
undecided 1 1.9 100.0
Total 53 100.0
This table is showing the responses of how responding valuers see obsolescence. 54.7% of
them strongly agree that obsolescence id much more than physical deterioration. 41.5 %
further agree that it is more than physical deterioration and just 1.9% of respondents disagree
while another 1.9% remains undecided.
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Figure 4.7
The figure above is a representation of respondents’ opinion on whether functional and
technological is the same thing. 9.43% strongly agree that they are the same thing . 41.51%
agree that they mean the same while 28.30 disagree. The percentage of those that strongly
disagree is 18.87% and an insignificant number of respondents totaling 1.89% are undecided.
From this analysis we can infer that more than half the proportion of respondent are of the
opinion that technological and functional obsolescence are the same thing.
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4.9.9.7 Respondents’ opinion on whether economic obsolescence is the same as external
obsolescence
options
Frequency Percent
Cumulative
Percent
strongly agree 5 9.4 9.4
agree 18 34.0 43.4
disagree 14 26.4 69.8
undecided 16 30.2 100.0
Total 53 100.0
From the table above, only 9.4% of respondents strongly agree that economic obsolescence
and external obsolescence are the same. 34.0% agree that they are the same while 26.4% and
30.2% disagree and undecided respectively. It can however be inferred that concept of
economic obsolescence seem to be the least understood of all the concept of obsolescence.
67
Figure 4.8 Respondents’ opinion on whether depreciation is a loss of value due to
any cause
The statistics above shows 56.6% strongly agree that depreciation is a loss of value due to
any course. Another 30.2% agree that it is a loss of value due to any cause, while 5.7%
disagree. The percentage of respondents who strongly disagree is 1.9% and another 5.7% of
the total respondents remain undecided. From this we can infer that majority of valuers have
a good understanding of the fact that depreciation can be a loss of value arising from any
cause.
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Table 4.9.9.8 Respondents classification of loss of value due to change in
technology
options
Frequency Percent
Cumulative
Percent
technological
obsolescence
47 88.7 88.7
functional obsolescence 5 9.4 98.1
economic obsolescence 1 1.9 100.0
Total 53 100.0
From the table above 88.7% of respondent classify loss of value due to change in technology
as technological obsolescence, 9.4% of the respondent classify it as functional obsolescence
while 1.9% of the respondent classify it as economic obsolescence. It can therefore be
inferred that the respondents have a good understanding of technological obsolescence.
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Table 4.9.9.9 Respondents’ classification of loss of value due to reduction in demand for
the product produced by the machine
options
Frequency Percent
Cumulative
Percent
technological
obsolescence
1 1.9 1.9
functional obsolescence 14 26.4 28.3
economic obsolescence 38 71.7 100.0
Total 53 100.0
It can be shown above the loss of value due to reduction in demand for the product produced
by a machine is classified as technological obsolescence by 1.9% of the respondents, 26.4%
classified as functional, while the highest proportion of respondents classify it as economic
obsolescence. It can thus be inferred that economic obsolescence is easily recognizable in
plant and machinery valuation when it emanates from the demand for the product produced
by the plant or machinery.
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Table 4.9.9.9.1 Respondents’ classification of loss of value due to change in legislation in
the industry employing the services of the plant or machinery
options
Frequency Percent
Cumulative
Percent
technological
obsolescence
3 5.7 5.7
functional obsolescence 12 22.6 28.3
economic obsolescence 35 66.0 94.3
undecided 3 5.7 100.0
Total 53 100.0
5.7% o classify a loss of value of a machine which arises from a change in legislation in the
industry employing the service(s) of machine as technological obsolescence. Another 22.6%
classify it as functional obsolescence while the largest proportion of respondents classifies it
as economic. A fraction of the respondents which amounts to 5.7% however remain
undecided. It can however be inferred that obsolescence factor which arises as a result of
legislation is not easily classified like other obsolescence which emanate from the machine
itself.
71
4.9.9.92 Respondents’ classification of loss of value due to decreased productivity of the
machine
options
Frequency Percent
Cumulative
Percent
technological
obsolescence
1 1.9 1.9
functional obsolescence 43 81.1 83.0
economic obsolescence 9 17.0 100.0
Total 53 100.0
From the above statistics, 1.9% classify loss of value due to decreased productivity of a
machine as technological obsolescence, another 17.0% classify it as economic while a very
significant proportion of respondents (81.1) classify it as functional obsolescence. It can
however be said that respondents have a good perception of functional obsolescence.
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CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of findings
The average qualification of practicing estate surveyor is either Bsc/HND or
both,
Most estate surveyors belong to NIESV along with only a small proportion
belonging to other affiliated professional bodies.
Most estate firm has an average staff number of between 6-10 with an average
of between 1-5 surveyors as NIESV member.
A large proportion of estate surveyors attend training programmes often.
This study reveals that majority of estate firms specializes in all aspect of real
estate profession apart from development as only very few firms are into
property development
There is a need for practicing surveyors to thoroughly understand the concept
of obsolescence especially those that emanate form factors exogenous to the
machine.
The field of plant and machinery is valuation is one of the most challenging in
the valuation discipline
The basic understanding of the concept is not independent of the technical
knowledge of the concept because; a even a competent plant and machinery
73
valuer must be analytical and speedy in capturing critical issues in his
valuation undertakings. This requires both technical and economic knowledge
of the subject of plant and machinery valuation.
The study also reveals that despite the specialized nature of plant and
machineries, the direct comparison is still widely adopted frequently by
practicing valuers to arrive at an opinion of value.
It is revealed that valuers give more importance to wear and tear and physical
deterioration than various obsolescence factors when carrying out plant and
machinery valuation
The study reveals that transparency is the over-riding factor that determines
the choice of method of valuation, while logicality and convenience associated
with the method ranks next to it.
There is a conceptual understanding of depreciation and obsolescence to a
large extent among surveyors but how ever the technical understanding is still
lacking among most surveyors
This study equally reveals that most surveyors perceive their judgments as
very important and an over-riding factor than all other underlying issues in
plant and machinery valuation.
Economic obsolescence is the least understood in its technical sense among 1
practicing surveyors.
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5.2 Conclusion
This study has identified valuers’ perception of depreciation and obsolescence and
also evaluated their level of understanding on the subject matter. Method of valuation
used by valuers were also found to depend largely on the transparency of the method
will in turn be dependent on the valuer’s judgment in other to arrive at an opinion of
value. Many valuers give the most consideration to physical deterioration and wear/
tear without taking into consideration some or all of the various obsolescence factors.
It is also revealing to know that direct comparison and investment method of
valuation are more frequently used than indexation which is theoretically ideal for the
valuation of plant and machinery.
5.3 Recommendations
The following recommendations aim at ensuring a better perception and
understanding of valuers in the concept of depreciation and obsolescence with a view
to increase the reliability of value opinion given by the valuer.
They should develop and equip themselves with contemporary issues that
borders on plant and machinery valuation and also try and relate what they
have learnt in school to practice.
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They should acquire skill, patience and also be analytical so that critical
issues such as the determination and quantification of obsolescence will not be
overlooked
In other to determine the level of depreciation and obsolescence, valuers
should equip themselves with contemporary methods of valuation of plant and
machinery.
Valuers should learn to engage the services of an expert in a particular type of
industry and manufacturing.
76