Economic Obsolescence in Equipment

[propperson]

I am trying to value equipment at an ongoing crushed stone plant. Building and road construction in our area have picked up.

The plant production in tons is down about 30 thousand pounds from 2010 to 2011, the tons sold is up about 20,000 from 2010-2011.

Net sales is up but the plant imcome is down.

Gross margin % was at 58% in 2005 and is at 69% in 2011.

Production shifts has went from 1 shift in 2009 to 2 shifts in 2011.

Inventory turnover has went from 2.3 times per year in 2010 to 2.6 times per year in 2011.

I can find no standard plant capacity on the U.S Dept of Commerce survey of plant capacity so I do not have a "standard" to go on.

I can not find the EO for this equipment. I see ups and downs but no definate indicator of EO.

Does anyone with experience in EO have any suggestions. Thanks

 

[Terrel L. Shields]

Non-Obsolete equipment is generally valued in use - a lot of reports I've seen use 50% of the replacement costs. Obsolete equipment is further discounted..mainly at auction pricing which is pretty much scrap price. Equipment with a known life could be valued accordingly. Otherwise, I would check used equipment sites. If it gives a price and an age, you can guessimate the % good remaining.

Production tells the value of the real estate and the value relates to the price of product and annual production which can be DCF or using a sinking fund formula like Hoskolds or Inwoods.

 

[Restrain]

M&E depreciates very quickly on the front end, stabilizing if functional and maintained at somewhere between a third and a half of cost. Look at a D-8 dozer for example. Heavy equipment of the type you describe has a long life, and functionality etc does not drop off like high tech equipment.

At the same time, the value would be "in use" since the resale would approach salvage value. Given today's economics, you would buy an existing operation and, if opening a new pit, relocate the equipment rather than buying new, IMO.

Just something to think about