In this section I shall brief you on the methodology to be adopted while carrying out the valuation of Plant & Machinery.

There are three basis one can adopt for valuation of plant & machinery (P&M): –

Machine by machine basis: Under this methodology, all the machines are physically verified, along with their technical specifications after correlation with the fixed asset register. Thereafter, the replacement prices are worked out after making market inquiries and obtaining their offers/ quotations.

This method is one of the best methods; however, it has certain limitations as well. Firstly, it is very time-consuming and an expensive exercise since one has to obtain offers from the original suppliers.  Moreover, there is always an element of assumption for discounts which may vary based on different factors.

Capacity – Cost method: It has been found from experience and statistics that there is a relationship between capacity of plant and its cost which is generally defined as follows: –

Cost of Unit A/ Cost of Unit B = (Capacity of Unit A/ Capacity of Unit B) ^x

Note: Where “X” is exponent factor and varies from 0.43 to 0.85 depending upon the process industry.

This technique is generally applicable more for the process Industry. It is not applicable in all situations and should be applied on merits. This method also has certain limitations such as it can be applied to nearly equal specifications plant only. Further, “X” factor also gets revised over a period of time.

Escalation Method:  As explained in the last edition, it is considered a nearly correct method since the original cost is escalated based on the inflationary indices. The cost of preoperative expenses is required to be adjusted in original cost prior to applying suitable indexation under this method. The machines are generally divided into two categories and following adjustments are made: –

• Indigenous Equipment:

o    Adjustment for cost by RBI Index

o    Adjustment for Excise duty and Vat

• Imported equipment:

o    Adjustment of imported machinery by Marshal & Swift Index or Specific country escalation index

o    Adjustment for Exchange variation

o    Adjustments for custom duty

Though it is quite possible that some of the Plant & Machinery (P&M) could have escalated more than the indices, but on the same side, it is also true that prices of some of the items might have fallen. Since insurance is taken on an overall method instead of item-by-item basis, in my view the valuation by escalation method is the correct basis and is also an internationally accepted norm for valuation of assets.

In short, I would like to mention that no valuation exercise can give us the exact replacement cost of the item /machinery/asset. Our effort is only to obtain a near correct value of the replacement cost.