Establishing the Replacement Cost New (RCN) is the starting point for a technically defensible Plant and Machinery Valuation. The framework then considers physical depreciation, Remaining Useful Life (RUL), functional obsolescence and the appropriate valuation methodology for the equipment and its operating context.
Get Expert Advice Government Approved P&M ValuationThe RCN for any piece of equipment is the amount required to procure an equivalent new unit from the most cost-effective current source.
For domestically manufactured equipment, the RCN is typically the current ex-works price from the manufacturer plus freight to site plus installation labour and commissioning costs.
For imported equipment, which represents a large share of India’s industrial capital stock in pharmaceutical, semiconductor, food processing, automotive, and precision engineering sectors, the RCN computation includes:
The Government Approved P&M Valuer sources current RCN data from these inputs and applies the appropriate installed replacement cost for the specific equipment category.
The physical depreciation determination is the step that most distinguishes a Government Approved P&M Valuer’s certificate from a desktop estimate. The physical inspection establishes the actual condition, utilisation history and remaining service potential of the equipment.
Review of the equipment’s maintenance log, where available; visual assessment of paint, lubrication and housekeeping condition; and evidence of scheduled preventive maintenance versus breakdown-driven reactive maintenance.
Where the equipment has an hour meter, such as engines, compressors and generators, recorded hours provide a direct utilisation metric. For machine tools, the production log provides the utilisation basis. High utilisation reduces RUL; low utilisation extends it.
Assessment includes wear marks on machined surfaces; bearing noise and vibration; oil leaks and seal condition; structural cracks on frames and pressure vessels; electrical insulation condition on motors and switchgear; and corrosion on wetted surfaces.
RUL is the key output of the physical inspection. A twelve-year-old CNC machining centre with a Total Economic Life of 20 years may retain 10–12 years of RUL when maintained excellently and operated at low utilisation, while poor condition and high utilisation may reduce RUL to only 3–5 years.
The Depreciated Replacement Cost approach establishes current replacement cost and adjusts for physical depreciation and relevant obsolescence.
Secondary-market evidence is considered where reliable comparable transactions, dealer information, auction evidence or other market data are available.
Applied where specific equipment generates identifiable income and the income attributable to the equipment can be reliably assessed and capitalised.
The Income Approach is a secondary methodology for most P&M valuations; the DRC and Market Comparison approaches are primary where applicable.
Get Expert Advice Discuss Your P&M Valuation →A captive power plant, whether gas turbine, combined cycle or diesel generator set, may generate income where capacity is leased to neighbouring industrial units at a per-unit tariff. The net income from the leasing arrangement is capitalised at an appropriate yield to produce the income-based value.
Weighbridges, scanning equipment and other infrastructure equipment that generates fee income may be valued by capitalising the Net Operating Income at a market rate of return.
Where specific equipment is leased to third parties, such as tower cranes, medical equipment or construction equipment rental fleets, lease income may be capitalised at the appropriate yield.
Discuss your equipment, RCN, physical condition, RUL and applicable valuation methodology with our valuation team.