Models for Estimating Depreciation in Items of Plant, Machinery and Equipment: Analysis and proposals

S.A. Smolyak
Professor, the Central Economics and Mathematics Institute of the Russina Academy of Science

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Abstract

We suggest a novel application of the Discounted Cash Flow Method for assessing Percent Good Factors in respect of second-hand items of machinery and equipment. It is grounded in the principle of highest and best use and account for such factors as the salvage value of equipment and associated property, and income taxes without requiring cashflow forecasts of the income obtainable from using the equipment.

Application of the suggested DCF method to machinery and equipment valuation offers solutions in regard of the following, which are elaborated in Paper:

  1. Eliciting and formalizing general patterns of change in the value of aging equipment;
  2. Revealing some inconsistencies in a number of tabular and analytical methods for determining Percent Good Factors;
  3. Developing new and practical analytical models which consistently describe the dependency of Percent Good Factors on the age of equipment;
  4. Suggesting a method for determining Percent Good Factors for equipment aged beyond its useful economic life;
       The most pertinent results may be achieved from this method when the equipment, depreciation process is treated in a continuous time formulation.