Influence of Deterioration of Machinery and Equipment on the Dynamics of their Market Value

 
PIIS042473880005785-2-1
DOI10.31857/S042473880005785-2
Publication type Article
Status Published
Authors
Occupation: Principal Scientific Researcher
Affiliation: Central Economics and Mathematics Institute, Russian Academy of Sciences
Address: Moscow, Russian Federation
Journal nameEkonomika i matematicheskie metody
Edition
Pages124-140
Abstract

Valuing machinery and equipment, it is usually necessary to determine their depreciation/obsolescence. Dependencies of the Percent Good Factor on age are used for this purpose. The shape of such dependencies is not always justified enough. Because of this, the value of fairly old machines is either too low or very high. To eliminate this drawback, this article proposes different descriptions of the process of deterioration for machinery items. At the same time, the deterioration of the operational characteristics of machinery (productivity, failure rate, operating costs, maintenance and repair costs, use-time ratio of the machine) is not tied to age, but to machine's cumulative hours of operation. To calculate the market value of the machine, we use the Discounted Cash Flows method. To avoid subjectivity in the long-term forecasting of cash flows, we apply the principle of anticipated benefits to a small forecast period and combine it with the highest and best use principle. As a result, it takes the following form: the asset value at the valuation date does not exceed the expected value of the discounted cash flow from its use during a small period (including the asset value at the end of the period), and coincides with this expectation if the asset is used in the highest and best way. A mathematical model based on this principle allows us to obtain analytical expressions for the market value of the machine. For each type of machinery and equipment items, the calibration parameters of the model can be selected from the data on the main characteristics and market prices of new and used machinery items of this type. The constructed model was used to estimate depreciation dynamics for two types of construction equipment. The results obtained are in good agreement with the data on the market prices of such equipment of different ages.

Keywordsmachinery, equipment, maintenance, repair, market value, depreciation, market approach, anticipation of benefits principle, highest and best use, reliability.
AcknowledgmentThis study was in part financially supported by the Russian Foundation for Basic Research (project 18-010-99666)
Received13.08.2019
Publication date22.08.2019
Number of characters45264
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