Discounted cash flow method in valuing machinery and equipment

Discounted cash flow method for valuating machinery and equipment: The most appropriate method in this method (income method) and the easiest to apply is the discounted cash flow method.

This method applies to investment and properties of general use by an accredited valuer. Where there is a defined and established rental market or there is a defined and tangible flow of benefits that may be attributed to the asset being valued. When applying this method to plant valuation and machinery and equipment valuation, attention is paid either to the income-generating element or to the potential cost savings and the risks and uncertainties related to it.

The income method is appropriate to use when it is possible to determine the average economic life of the plant and valuate the machinery and equipment, or if the final value is known at the end of the expected life.

The method of capitalizing income or interests poses several obstacles, including the following:

• The future profits (interests) of most plants, machinery, and equipment are relatively inseparable from the profits of the entire enterprise, and information on the operational costs involved is usually unavailable.
• It is difficult to determine one important factor: the discount rate.
• The risks of special items or those involving distinctive technologies are often higher than for alternative unit uses because plants and machinery are characterized by liquidity.

Such as traded assets, they also lack comparative market data, and thus the risks and returns are related to plants and machinery, as well as those related to current assets. Ideally, the best source of returns comes from investors who participate directly in different markets, however, this information is often considered confidential.

Therefore, indirect methods must be applied to determine potential rates of return.

(Valuation of machinery and equipment)

Here are some suggested indirect methods that can be applied:

A. Market price method

In this method, the selling prices of similar investments are compared to the expected future benefits during valuating factories and valuating machinery and equipment to obtain an indication of the implied rates of return. However, the problem is the general lack of market data.

B. Method of comparing quality characteristics:

The suitability of the asset being valuated is compared to those alternatives with a known return equation.

Asset Experts Company for Professional Consulting is a certified valuator for valuating factories and valuating machinery and equipment.

‫