CHAPTER ONE

1.0 Introduction

1.1 Background to the study

Plant and machinery are referred to as installations and support facilities for manufacturing in

an industry designed to perform a specific pre-determined function. Whether used singly or in

combination with other items to enhance the productivity or operating facility; and includes

all devices in fixed or movable form, other than real estate, deployed in manufacturing,

processing or assembling of products from the stage of raw materials to finished goods

(Budhbhatti 1999). Valuation of Plant and Machinery is an important and very interesting

area that calls for a lot of serious work, expertise and experience on the part of the Valuer.

But according to IVS (revised 2005) “Plant and machinery collectively constitute a general

class of tangible property asset and this assets have particular characteristics that distinguish

them from the most types of real property and that influence both the approach to and

reporting of their value. In this era of advanced industrialization, where machines are taking

over the majority of production functions previously performed by men, it becomes

imperative that the appraisal of this special category of assets be treated with utmost care.

Ifediora (1999), in his view defined plant and equipment as “Tangible fixed assets of a

business over a long period and are not usually bought with the aim of resale. The task of a

plant and machinery valuer seems challenging when one pauses to reflect upon the immense

variety of plant, machinery and equipment at work in factories especially in the industrialized

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nations, from the smallest personal computers to ocean going cargo ships, the prospect of

becoming a plant valuer must surely be both challenging and exciting. The purposes for

which the valuation of plant & machinery may be required will include insurance, financial

and market purposes etc. and the enormity and scope of work involve would depend upon the

size of the plant, machinery and equipment in question. It is a common saying in all appraisal

works involving adjustment for depreciation (physical, technological, functional or economic

obsolescence) that the value obtained is as reliable and accurate as the depreciation factor

used in its computation. Hence the valuer’s perception of depreciation and obsolescence

factors and how they affect plant and machinery is crucial.

Traditionally, there are three approaches to value, and these are cost, sales comparison and

income capitalization approaches. However there are instances where a valuer may have to

result into some other methods such as the residual method of valuation as well as the profit

or account method. The cost method seems to be the most widely used due to its suitability

for appraising various types of assets. However, with this method the issue of depreciation

and obsolescence arise and as a matter of fact the cost method is sometimes referred to as the

depreciated replacement cost (DRC) for short. This is not just a mere coincidence of

nomenclature but rather it suggests the inseparable relationship between the cost method and

depreciation factors. It has been observed that there are discrepancies between figures arrived

at by different surveyors on the same asset using the same methods of valuation. These

discrepancies in many cases are significant owing to the difference in the treatment of various

obsolescence factors. Otegbulu (2001) observes that the investment method produces a lower

figure when compared with depreciated replacement cost (DRC) method. He however noted

that the DRC produces a higher figure because the method is not properly applied as only

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asset condition (physical deterioration) is provided for in the valuation and that provisions

were not made for functional, technological and economic obsolescence where they exist. If a

valuation report on plant and machinery valuation is to provide a credible and reasonable

opinion of value upon which valuable investment and legal decisions may be based, then the

plant and machinery valuer must be ready to go through the rigor of physical inspection of

the subject asset, take full inventory or plant register and more importantly the effect of

physical deterioration and other obsolescence factor must be adequately considered.

The identification and quantification of all forms of obsolescence is a fundamental procedure

in a cost approach to the appraisal of plant, machinery and equipment. While the requirement

for this procedure is rarely disputed, the quantification of obsolescence is often the source of

controversy. In view of this reason, the research work would evaluate the valuers’ perception

of depreciation and obsolescence factors within the context of plant, machinery and

equipment valuation among practicing Estate Surveyors and Valuers in Lagos metropolis.

1.2 Statement of the research problem

Valuation of plant and machinery is the analysis which is largely qualitative with heavy

dependence on the valuer’s judgment (Budhbhatti, 1999); hence it is probably the most

challenging aspect of the valuation profession, especially when there are no market

comparables for the subject asset. Consequently, the valuer results into using the cost

approach which is often subject to the valuer’s understanding of depreciation and

obsolescence in arriving at a reliable market value. The identification and quantification of

physical, functional and economic obsolescence is an important procedure in any cost

approach valuation analysis. Nonetheless, some plant and machinery valuers refuse to

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recognize economic obsolescence and functional obsolescence as a generally accepted cost

approach allowance. Some valuers assert that a cost less physical deterioration calculation

encompasses all forms of obsolescence. This controversy on the classification and

quantification of obsolescence factors pose a serious problem to the plant and machinery

valuer. This problem requires an evaluation, which is aimed at providing an insight to how

different valuers perceive depreciation and obsolescence, its determination and

quantification, with a view to providing a common ground for its treatment in plant and

machinery valuation, and also to give more credibility and reliability to the value obtained

through the depreciated replacement cost method of valuation.

1.3 Research questions

The research questions will include the following;

• How do valuers of plant and machinery perceive depreciation and obsolescence?

• What significance do various forms of obsolescence have on plant and machinery

value?

• How do valuers see other forms of obsolescence as different from physical

deterioration?

• What is the distinction between depreciation and other obsolescence factors in plant

and machinery valuation?

• What is the difference between technological obsolescence and functional

obsolescence in plant and machinery valuation?

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1.40 Aim and objectives of the research
1.41 Aim

The aim of this study is to examine the current level of understanding of depreciation and

obsolescence concept and their adoptions in plant and machinery valuation in the study area.

1.42 Objectives to the aim of the research

The research goal will be achieved through the following objectives:

• An evaluation of approaches involved in plant and machinery valuation.

• Examination of the concept of depreciation and obsolescence in relation to plant and

machinery valuation

• An evaluation of the distinction between depreciation and other obsolescence factors

in plant and machinery valuation.

• Examination of the level of valuers understanding of depreciation and obsolescence in

plant and machinery valuation

1.6 Significance of the study

Valuation as a profession is an art and a science. Its validity and reliability depends largely on

the appraiser’s intuition and subjective judgment in accordance with some laid down

procedures. Hence it becomes almost impossible to assume that an opinion of value derived

under such a circumstance will be accepted without further scrutiny. There has been strong

questioning regarding value opinion given by professional estate surveyors and valuers

especially when their computation has to do with depreciation and obsolescence in the

depreciated cost approach (DRC).It is shocking to know that even among practising surveyors
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there is a great divergence of opinion when it comes to the issue of depreciation (physical

deterioration, functional obsolescence, functional and economic obsolescence). For example

in the depreciated cost approach of a building, some argued that depreciation should only be

accounted for after the professional fees have been added to the actual cost of the building,

while others argued that depreciation should have come before the addition of the professional

fee, neglecting the fact that the professional fees are integral part of the overall building cost.

Due to divergence of opinion in perception and understanding of depreciation and various

obsolescence factors in plant and machinery valuation and a need for the promotion of a

proper understanding of same, this study shall strive to explore the various school of thoughts

as regards depreciation and obsolescence in plant and machinery valuation with a view to

bridging the divergence opinion among practicing estate surveyors and valuers as well as

creating a common ground for accounting for obsolescence among academicians and

practioners in the built environment professions.

1.7 Scope of study

The scope of the study is restricted to estate surveyors and valuer practising within the Lagos

metropolis. The study will deal basically with evaluating the valuers’ perception of

depreciation and obsolescence as it concerns plant and machinery valuation. Valuers

understanding on the subject matter will be restricted to areas of plant and machinery alone

and how these factors affect value of plant and machinery. This study shall however be

limited to registered surveyors within the metropolis of Lagos. This research shall also be

collecting data from previous findings on valuers’ perception of various obsolescence factors

and how much relevance is given to each in arriving at a reliable valuation figure. Also data

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will be collected directly from firms of registered estate surveyors and valuers within the

aforementioned area.

1.8 Limitation of encountered

Constraints to the research study are:

Financial limitations: This includes cost of transportation to the study area, the cost of

getting materials both from the library in form of photocopies and the cost of typing.

Time constraints: A lot of time was involved in the process of gathering data, and lectures

were skipped on several occasions.

Administration problems: Some of the respondents were either indisposed or very

occupied, and could not provide enough of information

1.9 Definition of terms

• Plant: an assemblage of asset that may include specialized non permanent building,

machinery and equipment.

• Plant and Equipment: assets intended for use on a continuing basis in the activity of

an entity including specialized non permanent building: machinery (individual

machines or collections of machines.

• Depreciated Replacement Cost: An application of the cost approach used in the

assessing of specialized asset where direct market evidence is limited or unavailable.

• Depreciation: In the context of asset valuation, depreciation refers to the adjustment

made to the cost of reproducing or replacing the asset to reflect physical

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 deterioration, functional obsolescence and economic obsolescence in order to

estimate the value of the asset in a hypothetical exchange in the market where there is

limited or no direct market comparison.

• Economic Obsolescence: This refers to the impairment of desirability of useful life

arising from factors external to the property, such as economic forces or

environmental changes which affect supply-demand relationships in the market. Loss

in the use and value of a property arising from the factors of economic obsolescence

is to be distinguished from loss in value from physical deterioration and functional

obsolescence, both of which are inherent in the property. Also referred to as Location

or Environmental Obsolescence.

• Functional Obsolescence: A form of depreciation in which the loss in value or

usefulness of the property is caused by inefficiencies or inadequacies of the property

itself, when compared to a more efficient or less costly replacement property that new

technology has developed. Symptoms suggesting the presence of functional

obsolescence are excess operating cost, excess construction, (excess capital cost)

over capacity, inadequacy, lack of utility or similar conditions

• Fair Value: An amount for which the asset could exchanged or a liability settled

between knowledgeably willing parties in an arm’s length transaction.

• Intrinsic Value: The amount considered on the basis of an evaluation of available

fact to be the “true” or “real” worth of an asset.

• Machinery: An apparatus using or applying mechanical power, having several parts

each with a definite function, and together performing certain kind of work.

• Cost : The amount required to create, produce, or obtain a property

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• Physical Obsolescence: This is the tear and wear, deterioration arising from age, use

and low level of maintenance leading to a decline in value.

• Economic life: The period of steady returns after which it is uneconomical to use a

particular asset

• Effective age: An indicative of the condition of utility of an asset. This is usually

limited to physical life or can be a reference to age within an economic life.

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 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

According to IVSC (2004), “Plant and equipment combine to constitute a wide variety of

situations requiring skillful assessment of the utility of the property valued and careful

consideration of such property’s physical, functional, and economic characteristics”. Every

profession has its own challenges and intricacies, and the profession of plant and machinery

valuation is not an exception. Plant and machinery collectively constitute a general class of

tangible property asset IVS (revised 2005) and this assets have particular characteristics that

distinguish them from the most types of real property and that influence both the approach

and reporting of their values.

Budhbhatti (1999) quite supports this notion by reiterating that “plant and machinery fall

under all three categories of property i.e. investment property, marketable non-investment

property and non marketable non-investment property depending on the circumstance of the

ownership. Hence the characteristics of these categories of property should be put into
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consideration when valuing plant and machinery. Many plant and machinery valuers find it

very challenging as it may require the application of several knowledge, ranging from

accounting, engineering, and economics to valuation techniques.

The valuation of plant and machinery should however not be seen as just the valuing of the

physical array of several machines or their intergraded network of pipes, but the estimation of

the interest in plant and machinery and equipment in productive employment, generating

income or with income potential. Ifediora (2004) pointed out that plant and machinery

valuation is not valuing a mass of concrete and steel, or a lump of cast iron or an integrated

network of pipes, rather, it is a valuation of an interest in machinery and equipment in

productive employment, generating income or with income potential.

The valuation of plant and machinery will cover all items of machinery and equipment, trade

fixtures, furniture and equipments used in various industries or business organization. A

valuer of plant and machinery should however be ready to face the brain tasking and

multifaceted discipline of this aspect of valuation. Otegbulu (2006) acknowledge the

challenges faced by valuers of plant and machinery by saying that a competent Plant and

Machinery valuer will always encounter different unique and enjoyable assignments. He must

be very analytical and quick to capture the critical issues in his valuation undertaking. This

requires both technical and economic knowledge of the subject and equipment “. Many a

time the concept of obsolescence seems to be the most widely misunderstood of all the

factors among valuers when valuing plant and machinery. It is so misconstrued that some

even mistake obsolete machinery for obsolescence in machinery.

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A successful plant and machinery valuer in the twenty-first century will need more than just

the requisite training in the four corners of our universities to have a sound knowledge of the

practice. Hence exclusive exposure and implied familiarity to Valuation of Plant &

Machinery, masterly knowhow and computerized data bank on modern machinery, their

replacement, Production - rating and other intricacies are of outmost importance. Very few

surveyors engage in this aspect of the profession of valuation, for example according to Derry

1990, “There are probably only between 100 and 150 full-time practitioners working in the

United Kingdom which is a remarkably small number compared with the many thousands

engaged in the valuation of commercial and industrial properties”. Be this as it may, even

among the few practicing surveyors of plant and machinery, there still a misconception in the

evaluation of the weight of obsolescence as it affects the profession.

2.1 Overview of plant and machinery valuation

According to Derry, (1990) “When considering the aims and methodology of plant and

machinery valuation, the first question which must be addressed is, quite simply, 'What is

meant by plant and machinery?'. Basically, all tangible assets in commercial or industrial

undertakings will be considered to be plant and machinery with the exception of the land

and buildings and current assets (i.e., stocks, stores, work-in-progress, etc)”. Hence plant and

machinery are fixed assets. Otegbulu, (2001) opined that fixed asset is an accounting and

legal terms which refers to assets which are intended for use on a continuing basis in the

company’s activities and does not refer to physical immobility as the name may suggest, but

could include assets such as ship, motor vehicles, aircraft, railway engines, mobile cranes and

heavy moveable equipment, in addition to other forms of fixed asset like land, building and

installed plant and machinery.

However Budhbhatti, (1999) summarized plant and machinery of an enterprise to include all

devices in fixed or moveable form other than real estate, deployed in manufacturing,
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processing or assembly of products from the stage of raw materials to finished goods.

According to IVSC, (2004) “Plant is the assemblage of assets that are inextricably combined

and that may include specialized buildings, machinery, and equipment. The combination of

such assets may be achieved by means of integrated support structures; cladding and staging

that are incapable of being separated from the assemblage.Machinery may refer to Individual

machines or collections of machines. IVSC, (2004) further explained that a machine is an

apparatus using or applying mechanical power, having several parts each with a definite

function, and together performing certain kinds of work. Equipments on the other hand are

ancillaries that are used to assist the function of the enterprise/entity. Hence The International

Valuation Standards in 2004 Committee summarized the characteristics of plant and

machinery as tangible assets that:

(a) Are held for use in the production or supply of goods or services, for rental to others,

or for administrative purposes.

(b) Are expected to be used during more than one period.

2.2 Types of plant, machinery and equipment valuation

Plant and machinery may be valued for several reasons. What the content of a plant and

machinery valuation will entail as observed by Derry (1990) will vary according to the

purpose for which the valuation is required. He further found out that ensuring that the exact

content of an appraisal is right is not always given the attention which it deserves and that

errors in establishing the schedule of assets can lead to far greater inaccuracies than mistakes

made later on in the valuation process. A valuation exercise could cover so many types of

assets; however the main types of valuation may usually include the following:

(a) Open market valuation

(b) Financial valuation

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 (c) Insurance valuation

However the various purposes will include the following according to Budhbhatti (1999):

• Insurance

• Financial statements

• Bank finance

• Lease finance

• Liquidation

• Take-Over

• Merger

• Sale/Purchases

• Rating

• Insolvency etc.

(Otegbulu,2006) and Kuye (2009) said that the value of plant and machinery will be

determined by its output, productivity and utility relative to other asset which are available in

the market at a particular point and place and for a stated purpose . Kuye (2009) however

added that many people regard the new cost of an item as its present value. This he said is not

so. He went further to give a brief relationship between what a willing buyer will pay as price

for a machine in relation to output, productivity and its quality as follows:

• Output dependent on the rate and amount a machine can produce i.e. the faster it can

be made to work and the larger the work it can handle, the more expensive it will be.

• Productivity is subject of the running cost, hence the lower the its running cost, the

more sought after and more expensive

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 • Quality is a function of the standard and the life span of a machine. The better the

standard of the work it produces and the length of its life, the more expensive.

2.3 Concepts of value in plant and machinery valuation

Fair market value (removal): This is the estimated amount, expressed in terms of money,

that may reasonably be expected for a property, in an exchange between a willing buyer and a

willing seller, with equity to both, neither under any compulsion to buy or sell and both fully

aware of all relevant facts, as of a specific date, considering the cost of removal of the

property to another location.

Fair market value (in place and in continued use): This is the estimated amount, expressed

in terms of money, that may reasonably be expected for a property in an exchange between a

willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or

sell, and both in Place and are fully aware of all relevant facts, including installation, as of a

specific date and assuming that the Continued Use business earnings support the value

reported. This amount includes all normal direct and indirect costs, such as installation and

other assemblage costs to make the property fully operational.

Fair market value (installed): is the estimated amount, expressed in terms of money, that

may reasonably be expected for an installed property in an exchange between a willing buyer

and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both

fully Installed aware of all relevant facts, including installation, as of a specific date. This

amount includes all normal direct and indirect costs, such as installation and other

assemblage costs, necessary to make the property fully operational.

Orderly liquidation value: is the estimated gross amount, expressed in terms of money that

could be typically realized from a liquidation sale, given a reasonable period of time to find a

buyer or buyers with the seller being compelled to sell.

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Forced liquidation value: is the estimated gross amount, expressed in terms of money, that

could typically be realized from a properly advertised and conducted public auction, with the

seller being compelled to sell with a sense of immediacy at a specific date.

Market value: is the highest price in terms of money which a property will bring in a

competitive and open market under all conditions requisite to a fair sale, the buyer and seller,

each acting prudently, knowledgeably and assuming the price is not affected by undue

stimulus

Liquidation value in place: is the estimated gross amount, expressed in terms of money,

which could typically be realized from a failed facility, assuming that the entire facility

would be sold intact with a limited time to complete the sale as of a specific date.

Salvage value: is the estimated amount expressed in terms of money that may be expected

for the whole property or a component of the whole property that is retired from service for

use elsewhere.

Scrap value: is the estimated amount expressed in terms of money that could be realized for

the property if it were sold for its material content, not for a productive use.

2.4 Purposes of plant and machinery valuation

Qaiser (2000) observed that assets are valued for different purposes e.g. for taxes, balance

sheet, merger and acquisition, etc. They are also valued for the purpose of insurance. He

pointed out that there are various methods of valuation and the choice of an appropriate

valuation method will depend upon the purpose of valuation as also on the nature of assets

involved. Let’s briefly examine the various methods employed for valuation purpose and then

examine the current practices being followed in respect of valuation of assets for the purpose

of insurance.

The various methods used for valuation are as under:

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(a) Valuation based on replacement cost basis: Here the cost of a new machine of similar

nature, make and capacity if available is found out. This cost will represent the value on

replacement cost basis.

(b) Good as new: There are situation where machine / plant is working satisfactorily

because of good maintenance. In such situation, this valuation method is used which

represents the original actual cost less depreciation but adding back the maintenance

cost.

(c) Sum of part valuation: This method of valuation is used where the equipment is not of

composite nature. In this method all the different units / component are valued separately

and then added up to arrive at the composite value. But this method has the inherent risk

of technological process in that if one part is damaged but not available, the entire

assembly becomes scrap. The loss in such situation is not limited to that part only.

(d) Fair value method: This represents the value in exchange. This method of valuation is

applicable to assets that can be currently exchanged in the market for value e.g. whatever

may be the cost of production of LPG, its value in the market for sale in exchange for

cash is the fair value.

(e) Depreciation method:

i. Book Value: This represents the written down value of the assets in the books of

accounts. In this first year, this represents the actual cost of the asset and with each

passing year appropriate depreciation is charged and the value of the asset is accordingly

reduced. Over a period of time, the asset value becomes so low that it will not reflect the

true worth of asset.

ii. Market Value: In this method depreciation is allowed on current replacement value

of the asset for the number of years it has been in use to arrive at market value

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 2.5 Methods of valuation

Virtually all plants and machinery valuation uses the three basic traditional methods of

valuation in other to arrive at the various values intended by the valuer.

The three basic or conventional methods of valuation are the following;

(a) The cost approach (DRC)

(b) The market comparison approach

(c) The income approach

The depreciated replacement cost approach (DRC)

IVS (2004) has defined the depreciated replacement cost as ‘the current cost of replacing an

asset with its modern equivalent asset less deduction for physical deterioration and all

relevant forms of obsolescence and optimisation.’ The DRC approach is based on the

economic theory of substitution. Like the other valuation approaches listed above, it

involves comparing the asset being valued with another. However, DRC is normally used in

situations where there is no directly comparable alternative. The comparison therefore has

to be made with a hypothetical substitute, described in IVS GN8 as the modern equivalent

asset. The underlying theory is that the potential buyer in the exchange described in the

Market Value definition would not pay any more to acquire the asset being valued than the

cost of acquiring an equivalent new one. The technique involves assessing all the costs of

providing a modern equivalent asset using pricing at the date of valuation (RICS,

2007).This view is supported by Kwong and Montes Jr (2003) in their view on cost

approach as the cost to reproduce or replace in new condition the assets appraised in

accordance with current market prices for similar assets, with allowance for accrued

depreciation arising from condition, utility, age, wear and tear, or obsolescence present,

taking into consideration past and present maintenance policy and rebuilding history.

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 The cost approach is based on the concept of replacement or reproduction cost as an

indicator of value. A prudent investor would not be expected to pay more for an item than

the amount for which it could be purchased new. Further, to the extent that a particular item

provides less utility than a new one, its value will be less than the cost of a new replacement

or reproduction. To account for this difference, the replacement/reproduction cost new is

adjusted for losses in value due to physical depreciation, functional obsolescence, and

economic obsolescence.

The cost method is also known as the replacement cost method of valuation (Ifediora, 2009).

This has often been regarded as a method of last resort in many valuation exercises and it is

usually employed in the valuation of special assets in which most plant and machinery

belongs. Kuye (2009) however pointed out that the problem associated with the DRC is the

estimation of allowance for depreciation. Sayce and Connellan as cited in Kuye (2009) also

support this opinion by stating that “determination of the appropriate rate of depreciation is

important in the application of the DRC method.

Income approach

Income approach is based on the present value of cash flow that an asset can be

expected to generate during its remaining life. This approach is based on a forecast of the

business income and expenses that the property will generate over a given period of time. It

assumes that the value of the property is dependent on the ability of all the assets to earn a

reasonable return. This approach is best utilized for determining the business enterprise value.

Market approach

Schreiner, (2009) is of the opinion that the most widely used and accepted approach is the

market approach. This approach considers prices recently paid (or currently asked) for

similar items with adjustments made to indicated market prices to reflect certain conditions

of the comparables in contrast to the subject items. This approach is appropriately

19
 employed when valuing assets which are commonly bought and sold in arm's length

transaction, also Appraisal economics inc. is in support of this view and it describes the

market approach to involve a direct comparison of the property being appraised to similar

properties that have sold in the same or in a similar market. This approach is based on the

principle of substitution which implies that a prudent person will not pay more to buy a

property than it will cost to buy a comparable substitute property.

2.6 Identification of plant and machinery

The first step in the identification of plant and machinery is to take inventory. Ifediora (1999)

believes that the inspection and survey of plant and machinery should be compiled in an

inventory or schedule which will form the basis of valuation. Hence all items of plant and

machinery must be identified and be properly reported in other to arrive at a sound and

reliable value judgement.

Method of listing is not explicit to a specific industry and this opinion was supported by

Budhbhatti that the order of identification of plant, machinery and equipment can be changed

depending on the requirement of the clients.

He however classified the identification of plant and machinery into the following two

categories:

(a) Micro-identification

(b) Macro-identification

2.6.1 Micro-Identification

This deals with the precise description of a particular machine such that its details distinguish

it from other similar machines. Hence it concerns itself with listing a single machine

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Budhbhatti recommends the following procedure in the micro-identification:

Ingredients of description

• Client’s asset no./identification No., if available

• Description

• Model

• Type

• Size or capacity, if measured or given

• Serial number, if found

• Name of manufacturer

• Name of supplier when known

• Details of attachment, accessories and components, i.e. chucks, collets. Tooling etc.

for the machine

• Reference to any special foundations, servicing connections like wiring controls,

piping installations, as the case may be, if using an installed concept of value.

• Modifications or renovations from standard.

A typical inventory of plant and machinery will look as bellow:

S/NO DESCRIPTION QTY IDENTIFICATION DATE OF DEPRECIATION DRC REMARK

PURCHASE FACTOR

Source: property valuation technique by Olusegun Kuye, (2009).

Macro Identification: This is a method of studying the entire manufacturing process by

identifying major components contributing to the design capacity of the plant. The valuer

must identify and confirm the state of each item of machinery and equipment a manner that is

logical. The appraiser uses macro identification to identify the following:

• What the plant manufactures and produces

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 • How the plant is manufactures

• What the capacity of the plant is

Source: Alico, 1986

A list of information to be considered when gathering data for macro identification of

machinery and equipment is as follows:

• Product produced with each name and description

• Plant/ process by-product amount and uses

• Plant and/ or unit capacity per day, tons per day, annual production etc

• Plant capacities: design capacity, rated and actual consistent capacity.

• Operating mode, (days, month) if not identified in capacity

• Outlet for finished or intermediate product

• Available historical operational data over three to five years

• Fuel and power consumption by unit

• Operating staff per unit: type of control systems and if it is centralised

• Estimated maintenance budget over last three to five years and projected upcoming

budget if plant is operational

• General condition of plant and components

2.7 Concept of depreciation and obsolescence

Otegbulu (2008) describes depreciation has a loss not restored by current maintenance due

to all factors causing ultimate retirement of an asset, such as wear and tear, decay,

inadequacy, and obsolescence. Depreciation, for appraisal purposes, is a loss in value from

any cause. It is the difference between the value of a hypothetical new, similar property and

22
the current value of the subject property; the total measure of the reduced value at a

particular point in time. It is a by-product of the value estimate. Saskatchewan Assessment

Management Agency SAMA (2006) agrees with this view by saying that depreciation is a

loss in utility and hence value from any cause. Similarly, accrued depreciation is defined

as: a loss in value from the reproduction or replacement cost of an improvement due to any

cause as of the date of the appraisal. It may also be defined as the difference between the

reproduction or replacement costs of an improvement and its market value as of the date of

appraisal. It however pointed out that there are several definitions of depreciation but more

often than not more related to accounting than real estate appraisal.

The concept of depreciation without doubt is cardinal in the use of the depreciated

replacement cost method which is perhaps the most widely adopted method in many plant

and machinery valuation. Webster’s Third New International Dictionary (unabridged 1961 as

quoted in Budhbhatti 1999) defines obsolescence as “ a factor included in depreciation to

cover decline in value of assets due to invention of new and better processes or machine,

changes in demand, in design or in the art, and other technical or legal changes, but do not

cover physical depreciation. In 2001, Otegbulu explains depreciation as a premium that must

be paid by any asset whether in use or not in use. He went further to associate it with loss in

value of the asset. However it is important to know the difference between depreciation and

obsolescence as the latter is the reduction in value from factors such as change in technology,

economic or functional capacity exogenous to the asset (Otegbulu). Depreciation can also

connote the cost of operation or physical condition which results to a loss from upper limit of

value (Alico, 1968).

Otegbulu (2001, 2006) defines depreciation as loss not restored by current maintenance due

to all factors causing ultimate retirement of an asset, such as wear and tear, decay, inadequacy

23
and obsolescence. It is clear from the above literatures that depreciation involves a loss in

value of an asset and that obsolescence does not equal to depreciation. It can also be said that

obsolescence is a type of depreciation allowance or one of the factors responsible for the loss

in value of an asset. Budhbhatti (1999:105) identifies three categories of obsolescence as

follows:

• Technological

• Functional

• Economic

Otegbulu (2008) quite agrees with Budhbhatti by identifying obsolescence as technological,

functional, and economic in nature.

However IVSC, (2007) tends to replace obsolescence for depreciation allowance and in their

own classification, they identify the following three principal types of depreciation allowance

or obsolescence to include:

• Physical deterioration

• Functional obsolescence

• Economic obsolescence

• Technological obsolescence

Ifediorra (2009) however pointed out that the principal causes of depreciation are physical

deterioration, functional obsolescence and economic obsolescence. He equally identified

that there are three broad approaches to the estimation of depreciation. These three

approaches are

• Direct method
24
 • Indirect method

• Theoretical method

Baum (1991) explained depreciation as a loss in the existing use value of a property which he

said can be caused by physical deterioration or by functional obsolescence or aesthetics

obsolescence. While obsolescence is one cause of depreciation such as decline in utility.

From these various points of views, it can be inferred that obsolescence is not depreciation,

and also that obsolescence is only a cause of depreciation. Hence obsolescence can also mean

depreciation factor. According to Wu and Perry (2004), depreciation is the bye-product of

normal wear and tear associated with equipment use, as well as obsolescence and natural

deterioration while SAMA (2006) is of the opinion that the amount of depreciation charged

should correspond to the loss in value of the asset over time. This in their opinion goes on to

utilize the three commonly accepted depreciation method which are namely:

• Straight line method

• Sum of year digit method

• Declining balance method

Budhbhatti (1999) also cited the opinion of TGOVOFA and TGOVOA on depreciation as the

measure of wearing out consumption or other permanent loss of value of fixed asset whether

arising from use, effluxion of time or obsolescence through technology and market changes.

From this explanation, one can also see that obsolescence is just one of the causes of

depreciation and depreciation itself.

Physical deterioration

IVSC (2007) explains physical deterioration as wear and tear over the years and this they say

may be combined with lack of maintenance. The physical condition of an asset can be a

subject of different opinion (Alico 1968). This state is supported because many valuers
25
estimate the remaining useful life of an asset based on the observed condition, once the gross

value of the asset has been established by whichever method most appropriate, the valuer

depreciates this figure in other to arrive at the existing use value. There is however a need to

use a uniform basis of depreciation so that value judgments of valuers would be appropriate

of each other. Consequently Alico, (1989) suggested a reference table to be utilized as a

general basis for relating depreciation condition and remaining useful life. IVSC (2003) is of

the opinion that physical deterioration of the asset is to be viewed not in absolute terms, but

within context owing to the fact that in some markets and for some types of asset, a degree of

physical deterioration will not adversely affect the value; in other cases it will. It would be

inappropriate to determine the effect of physical deterioration on value depreciation only in

purely mechanistic terms.

Functional obsolescence

According to Budhbhatti, functional obsolescence arises when a machine already in function

loses its optimum capacity owing to a decline in co-operation from its operating counterparts.

He believes that this may be due to varieties of internal reasons. He also added that functional

obsolescence may arise due to faulty design or wrong location of industrial undertaking. This

may ultimately result into a decrease in value due to non-availability of spare parts or

accessories, or any other allied factors. IVSC, (2004) is of the take that functional

obsolescence arises where the design or specification of the asset no longer fulfils the

function for which it was originally designed. It added that in some cases functional

obsolescence is absolute, i.e. the asset is no longer fit for purpose.

Otegbulu, (2008) seem to be in support of this position by saying that any utilization of a

machine which is less than its highest and best use represents a loss from upper limit of value.

Hence this qualifies as functional obsolescence. In other cases the asset will still be capable

of use but at a lower level of efficiency than the modern equivalent, or may be capable of
26
modification to bring it up to a current specification. It is believed that the depreciation

adjustment will reflect either the cost of upgrading, or if this is not possible, the financial

consequences of the reduced efficiency compared with the modern equivalent. Other factors

that may be contributory to functional obsolescence are change in technology or legislation.

For example in the industrial sector where an existing plant may be incapable of meeting

current environmental regulations or in some cases the product it was built to produce is now

illegal (RICS 2007).

Alico (1968) views functional obsolescence from the perspective that it is the difference in

production rates and other capability characteristics between a new machine and the machine

being evaluated. Hence it arises when a machine already in use loses its optimum capacity

owing to a decline in interdependency from its operating counterparts. This view apparently

agrees with that of Budhbhatti. However Otegbulu (2001) asserts that the ability of an item of

plant and machinery to be utilized at its highest and best use would have some relationship to

value and any utilization less than its highest and best use represents a loss from upper limit

of value.

Economic obsolescence
This arises from the impact of changing external conditions on the demand for goods or

services produced by the asset. However, care has to be taken to distinguish these factors,

which are due to external factors, from factors that are specific to the entity (IVSC 2007).

Ifediora as cited in Otegbulu (2001) listed causes of economic obsolescence to include:

• Neighbourhood hazard and nuisance

• Heavy traffic flow

• Smoke

• Dust

• Offensive odours, or intrusion of incompatible uses

27
 • Decreasing demand etc

SBE (2009) supports this view and defines economic obsolescence, also known as external

obsolescence, as a loss in value resulting from adverse factors external to the property that

decrease the desirability of the property. It also added that this type of depreciation may

include the loss of value due to:

• Inflation

• High interest rates

• Legislation

• Environmental factors

• Reduced demand for the product a

• Increased competition

• Changes in raw material supplies

• Increasing costs of raw materials, labour or utilities without a corresponding price

increase of the product

It also added that loss in value attributable to economic obsolescence is usually beyond the

owner's control and is mostly atypical depreciation. It can, however, be normal in industries

where markets have shown long-term sustained and predictable shifts, such as the market for

semiconductor and other high-technology equipment. It can be identified by studying the

overall market conditions for a property. For example, if the output of a machine is

superseded in the marketplace by output of a different material (for examples, fibreglass for

28
metal or plastic for wood) and the market no longer absorbs the superseded output, then the

machinery has suffered economic obsolescence.

Remsha (2010) is quite in support of the opinion that economic obsolescence arises from

factors exogenous to the asset in question, hence the name external obsolescence.

29
 CHAPTER THREE
RESEARCH METHOD

3.0 Introduction:
The purpose of this chapter is to examine various statistical approaches that have been
explored in previous studies with a view to formulating an appropriate methodological
framework that will ensure the achievement of the study aim and objectives.

There is no single scientific method that applies to analytical studies; it is argued that the
choice made is driven by the research questions being answered (Asika1991). Put differently,
the method of any research endeavor is normally dictated by the purpose of the research and
the kind of problem that needs to be addressed.
Therefore, this chapter is divided into stages, which includes; examination of the study
problem, description of tools required for investigation, including questionnaire and
collection format.

3.1 The study population:

Adamu-Iria (2006) defined population as the collection, or set of individuals or objects whose
properties are to be analysed. Hence the population for the study comprised of registered
estate surveyors and valuers within Lagos metropolis (Lagos Island and Lagos Mainland
Local Government Area).
According to decree no.24 of 1975, estate surveyors and valuers are statutorily empowered to
carry out valuation for all purposes and this includes plant and machinery valuation. Hence,
this work basically involves the study of valuers’ perception and understanding of
depreciation and obsolescence in relation to plant and machinery valuation.

3.2 Sample Frame:

30
A sample frame was provided for the study so as to provide a comprehensive list for
identifying each member of the population. All registered estate firms in Lagos metropolis
were listed and adopted as the sample frame for the study. A major consideration for the
design of this sample frame is the financial costs involved in achieving considerable
coverage. Consequently, a decision is made to restrict the respondents to a manageable size
without compromising the study depth or width. The sample size was eventually chosen as a

rule of thumb by the project supervisor and consequently 60 estate firms were selected from
about 105 on the current list of members of NIESV in the study area. A random sampling
technique was used to select two surveyors in every valuation department of selected estate
firms and as such all surveyors had equal chance of being selected based on their availability
at the point of distribution.
3.3 Sampling Size:
Fifty seven percent (57%) of the total Real estate firm in the study areas were sampled. This
implies that the total number of respondents sampled were sixty (60). This study assumed that
the above sample size will help to assess objectively the perception of valuers on depreciation
and obsolescence in plant and machinery valuation in the study area.
3.4 Sampling Technique:
For this study, the simple random sampling technique was adopted in determining the size of
estate surveyors and valuers to be interviewed as the study sample. The procedure for simple
random selection goes thus: A list of estate firms in Lagos metropolis was drawn and an
unbiased random selection was done to determine the exact respondents that will form the
57% respondents for the study. This method afforded this study the opportunity to minimize
researchers influence (i.e. bias) as the selection process for selecting the respondents is not
under the control of the researcher.
3.5 Data Collection Method:
Approach adopted for conducting research depends on the nature of investigation and the
type of data or information required and available. Naoum (1998) identified various data
collection techniques available for eliciting data and information from respondent. They are
personal observation, in-depth interviews, mail questionnaire, self-administered questionnaire
and telephone survey.
This study administered questionnaire on all the study respondents i.e. (Estate surveyors and
valuers) and collected them at the appointed time. However, this method among others
ensures wider coverage, high response rate and reasonable level of accuracy (since adequate
31
 time is given to respondent to answer the questions). However, because of the possible
quality of experience and exposure of estate surveyors and valuers, this study will explore the
opportunity unstructured or informal interview where possible so as to ensure adequate data
collection and improve the overall quality of data collected.

(a) Questionnaire

The design of the questionnaire is structured to elicit response from respondents regarding
how they perceive depreciation and obsolescence when they carry out plant and machinery
valuation. It further investigates conformity with standards of valuation and the level of their
understanding of the concepts as it relates to this special class of valuation. These questions
are carefully constructed to supply information for the study.

• Multi-choice question: to provide various options to extract respondent’s perception

of the problem.

• Scaled question: to extract the intensity of the respondent’s feelings/perception

• Counter check questions: to find out if the respondents are giving the correct
responses, invariably the validity of the data is being checked.

Munasingbe (1993:89) and FAO (2000:10) are of the opinion that a standard questionnaire
opens up with a general “warm up “questions aimed at making respondents comfortable with
their participation in the survey. This is followed by three sections namely:

(a.) Firms/ surveyors details: this inquires about the respondent’s background, and
description of service rendered and the frequency of their engagement.

(b.) Surveyors’ approach to valuation and problems encountered: this section critically
examines the various methods which valuers adopt when carrying out plant and
machinery valuation. It also endeavors to find out which of the methods are the most
adopted and also explores the reasons for using such methods. It went further to
hammer on how valuers perceive depreciation and obsolescence and to what degree are
they accounted for in plant and machinery valuation.

(c.) Depreciation and Obsolescence plant and machinery valuation: this section
inquires of the respondent’s knowledge of the concept of depreciation and obsolescence

32
 with regards to plant and machinery valuation. Surveyors’ approaches to the valuation
of plant and machinery are extensively inquired into with emphasis on determining
whether each selected valuer knows the distinction between depreciation and various
obsolescence.

(b) Personal Interview

The interview is semi-structured owing to the fact that, there are specific topics related
to the research hypothesis to build the interview on. This way, other issues related to
the research area will be discovered after data analysis. Interview sessions will be held
briefly with respondent surveyors of selected firms and some specific question which
the questionnaire does not covered will be asked in other to further ascertain the
perception of these valuers on the subject matter.

3.6 Questionnaire Design:

To elicit information on the research problems, a single questionnaire was designed to suit
the research objectives. The questionnaire extensively contained close ended questions with a
few open ended ones. The very essence of open- ended question will be to allow respondents
to give detailed answers in cases where their experience cannot be easily articulated into a
few options. However, this was done with utmost care so as not to create problem when
carrying out analysis. Each of the study objectives will be adequately reflected in the
question. This is to ensure that the study is able to draw sufficient information that will assist
in the achievement of the study goal. The beginning aspect of the questionnaires raise general
questions that will assist the researcher in drawing inference. Questions like: Number of
staffs, year of establishment, academic qualifications of respondent and others will be raised.

The next class of questions bothered on achieving the first objective of the study. Questions
that highlighted salient issues on the evaluation of approaches adopted by valuers in plant and
machinery valuation and also an examination of the concept of depreciation and obsolescence
in relation to plant and machinery valuation. Also questions testing valuers’ perception and
understanding of the concept of depreciation and obsolescence were raised. The study also
sought to identify how valuers’ perception affects the methods adopted in their valuation
practices. Other questions contained in the questionnaire includes those which specifically
test valuers’ level of understanding of obsolescence and depreciation.

33
3.7 Method of Data Analysis:
The Statistical Package for the Social Sciences (SPSS) and Excel will be used for data
analysis. Oloyo (2001) noted that statistical analysis of the research result (i.e. data collected)
and their interpretation are important steps in the research process, and they are vital to the
decision that the researcher has to make on completion of the research study. However
analysis of data could range from descriptive analysis which includes: (measure of central
tendency, measure of variability, measure of relationship and measure of relative position
e.tc.). The variables for this study were measured mostly through rating and ranking
procedures which will yield nominal and ordinal quantities. It necessarily follows that the
tools of analysis for this research are basically descriptive statistics like means, deviations,
rank coefficients, and cross – tabulations.

3.8 Reliability and Validity Test:

Whatever research methodology is adopted for the research, reliability and validity issues
have to be considered. Hence reliability of a measure refers to the extent to which a test or
measuring procedure yields the same result when tried repeatedly, that is consistent. It might
be internal or external validity. External reliability is the more common of the two and refers
to the degree of consistency of a measure over time. Validity is the extent to which a measure
is actually in line with what the researcher sets out to measure and the extent to which the
results can be applied to new settings.
As such, this study’s questionnaire was structured to reflect the study’s objectives,
consequent upon which the supervisor carried out comprehensive review (construct validity).
The questionnaire was then exposed through pilot study conducted within the study area to
test for reliability. The pilot study involved 10 respondents, equally cutting across the study
population area.

34
3.8.1 Sources of Data Collection

The data gathered in the conduct of this research is the primary and secondary data.

Primary Data: This was gathered mainly through questionnaire administration, personal
observations and interviews. This research work is an action research and this I think is
necessary in order to be original.

Secondary Data: This was obtained from expert views, facts gathered from intensive reading
of journals, workshop papers, unpublished thesis dissertation, valuation guidelines, textbooks
related to the topic under focus. Consultation was made on-line by way of browsing the
internet which helped in linking up with other foreign universities libraries. The literature re-
view which forms the bulk of this research work is based largely on secondary data.

35
 CHAPTER FOUR

4.0 Presentation and analysis of data

This chapter focuses on the analysis and discussion of findings that were obtained from the

data generated through the structured questionnaire and semi structured interview guide

design for the purpose of this study. Data analysis took the form of the ordering of the

quantitative date gathered through the research after investigating the pattern of responses

and association among the data.

The date was prepared before use by way of examining for errors (numeric, transposition and

inappropriate response) without the addition of any subjective information, data used for the

analysis were drawn exclusively from questionnaire administered from which the following

variables were explained.

Table 4.0

CLASSIFICATION DESCRIPTION

Duration Duration of professional practice

Qualification Average academic qualification of

surveyors

Professional affiliation Professional body firm belongs to

Training Rate of attendance of CPDs,

Seminars, Workshops etc.

Plant and machinery valuation Rate at which plant and machinery

valuation are carried out

Depreciation and obsolescence Perception and understanding of

36
 depreciation and obsolescence in

plant and machinery valuation

Methods Techniques used in carrying out plant

and machinery valuation

Technical assistance Information gathered from other

professional

Source: Field survey 2010

4.1 Presentation and analysis of descriptive data

Data that are described in this work are presented as follows: The respondents are

practicing estate surveyors recognized by NIESV and registered within the Lagos metropolis.

The number of questionnaire distributed were sixty (60) for the purpose of this study but only

fifty three were returned. This represents a response rate of about eighty eight (88%).

Descriptive statistics of respondents

Table 4.1

Professional practice duration

years Frequency Percent Cumulative Percent
1-5 11 20.8 20.8
6-10 14 26.4 47.2
11-15 18 34.0 81.1
16-20 2 3.8 84.9
above 20 8 15.1 100.0
Total 53 100.0

37
 Source: Field survey 2010

From the analysis above, it shows that the surveyors practicing for up to 16-20 years have the

lowest percentage(3.8%) of the sample surveyed, followed by those practising for above 20

years (15.1), and next are those between 1-5 years (20.8%), which immediately follows by

those whose years of practice fall between 6-10 years (26.4%). Those practising between 11-

15 years form the highest percentage of respondent. It can then be inferred that there

responses will be borne out of experience.

Table 4.2 Average academic qualification of surveyors

Academic qualification Frequency Percent Cumulative Percent

OND 6 11.3 11.3
HND/BSc. 30 56.6 67.9
MSc./MBA 7 13.2 81.1
B-TECH 10 18.9 100.0
Total 53 100.0
Source: Field survey 2010

Base on the analysis shown, it is clear that the highest proportion (56.6%) estate surveyors

are either holders of HND or Bsc. Degree or both. Surveyors with B-tech which is a direct

equivalent of the Bsc rank second (18.9%), while holders of Msc. /MBA and OND follow

with 13.2% and 11.3% respectively. The inference that can be drawn from this is that the

average academic qualification in estate firms is HND/Bsc.

Table 4.3 No. Of staffs in firms

38
 No. Of staff Cumulative

Frequency Percent Percent

1-5 23 43.4 43.4
6-10 6 11.3 54.7
11-20 13 24.5 79.2
21-30 2 3.8 83.0
31-40 4 7.5 90.6
above 40 5 9.4 100.0
Total 53 100.0
Source; Field survey 2010

Considering the information above, it is conspicuous that the highest percentage of firm has

staff strength that ranges between 1-5 (43.4), this is immediately followed by those with 11-

20 staffs (24.5 %), firms with employee ranging between 6-10 come next with (11.3%), while

those above 40 has a percentage of 9.4%. firms with staff range of between 31-40 came 5th on

this scale with 7.5% and firms with staff strength of 21-30 have the least percentage of 3.8%.

What can be inferred from this is that majority of estate firms have small staff strength which

on the average about 2 or 3 people. This could have effect on the quality of job done

especially when the targets set by firms are far beyond what the man-power can

accommodate.

Table 4.4 no. Of surveyors elected as NIESV member in firms

No. Of surveyors elected as NIESV Cumulative

member Frequency Percent Percent

1-5 37 69.8 69.8
6-10 3 5.7 75.5
11-15 1 1.9 77.4
16 and above 1 1.9 79.2
none 10 18.9 98.1
Total 53 100.0
Source: Field survey 2010

39
The above data shows that the highest percentage of surveyors elected within a single firm is

between one and five (69.8%), this is followed by firms which do not have any of their

surveyors as elected members of NIESV (18.9%). Firms with elected members of between

six to ten represent 5.7% of the respondents while those between eleven to fifteen members

and sixteen and above have a percentage of 1.9%.

Table 4.5 Professional bodies affiliated to by firms

Professional bodies Frequency Percent Cumulative Percent

NIESV 28 52.8 52.8
RICS&NIESV 14 26.4 79.2
NIESV&IVSC 5 9.4 88.7
RICS,NIESV&CASLE 3 5.7 94.3
NIESV&REDAN 3 5.7 100.0
Total 53 100.0
Source: Field survey 2010

The analysis above shows that the largest proportion (52.8) of estate firms belong to NIESV

alone, while a sizeable amount (26.4%) belongs to RICS and NIESV. About 9.4% belong to

both NIESV and IVSC. Only 5.7% belong to RICS, NIESV and CASLE. Also another 5.7%

belong to NIESV and REDAN. It can be inferred the above information that the majority of

practising surveyors only aspire to become members of NIESV.

Table 4.6 Frequency of participation in training programme by firms

Participation Frequency Percent Cumulative Percent

often 26 49.1 49.1
very often 11 20.8 69.8
not often 7 13.2 83.0
rarely 9 17.0 100.0
Total 53 100.0
Source: Field survey 2010

Out of the fifty three questionnaires retrieved, twenty six respondents which constitute 49.1%

of the total respondent said they attend various development programme often. 20.8% attend
40
such seminars and activities very often while 7% and 9% do not often and rarely attend

respectively. The inference that be drawn is that the surveyors that attend CPDs and other

development programme often are more than those who do not attend such programme.

Table 4.7 Firms area(s) of specialisation

options Cumulative
Frequency Percent Percent
consultancy 2 3.8 3.8
all 25 47.2 50.9
agency&mangement 5 9.4 60.4
agency&consultancy 3 5.7 66.0
agency&valuation 3 5.7 71.7
feasibility&viability 3 5.7 77.4
studies&valuation
agency,management,co 7 13.2 90.6
nsultancy&valuation
agency 1 1.9 92.5
mangement,consultancy
and development
management,feasibility 1 1.9 94.3
&viability
studies&consultancy
valuation,consultancy& 3 5.7 100.0
development
Total 53 100.0
Source: Field survey 2010

From the table above, 47.2% of firms which represents the highest proportion specialises in

all various functions of an estate firm except property development. Those that specialised in

agency, management, consultancy and valuation rank second in terms of figure (13%). Firms

which carry out agency and management alone rank 3 rd with 9.4%. firms that carry out

agency and consultancy, agency and valuation, Feasibility& viability studies and valuation

and also those which engage majorly in valuation, consultancy and development have equal

41
share of respondents with 5.7%. The firms that specialised on agency, management,

consultancy and development comprise of 1.9% of the total while those that specialise in

management, feasibility and viability studies and consultancy also have 1.9%. we can infer

from this that majority of the estate firms specialise in all aspect of real estate profession

other than property development.

Table 4.8 Firms that carry out plant and machinery valuation

response Frequency Percent Cumulative Percent

Yes 48 90.6 90.6
No 5 9.4 100.0
Total 53 100.0
Source: Field survey 2010

From the above data it is clear that 90.6% of the respondents’ firm carry out plant and

machinery valuation while only 9.4% do not carry out plant and machinery valuation. Hence

we can infer that majority of the responses that we got on technical issues bordering on

depreciation and obsolescence will be borne more out of practice than what has been taught

in classrooms.

42
Figure 1

Source: Field Survey 2010

Out of the 53 respondents which were retrieved, only 46 gave their responses on this

question and those who have carried out P&M valuation between 1-5 times this year form the

major proportion (47.8%) of our respondents. Those who have carried out the exercise more

than 5 times this year is (28.3) while 13.0% have not carried out P&M valuation this year at

all. It can be inferred from this statistics that P&M valuation is not a engagement that comes

very often and that most estate firms may not carry out P&M valuation for more than e times

throughout the whole year.

43
Table 4.9 Frequency of use of cost method in plant and machinery valuation

options Frequency Percent Cumulative Percent

frequently 42 80.8 80.8

Rarely 10 19.2 100.0

Not used 0

Total 52 100.0

Source: Field survey 2010

From the above statistics 80.8% of the respondents use cost method of valuation frequently in

P&M valuation and only 19.2% use it rarely. However there is none who doesn’t use cost

method of valuation. What can be inferred from this is that cost method is the most used by

valuers when carrying plant and machinery valuation.

44
Table 4.9.1 Frequency of use of the investment method in P&M valuation

options Cumulative

Frequency Percent Percent

frequently 15 30.0 30.0

rarely 30 60.0 90.0

not used 5 10.0 100.0

Total 50 100.0

Source: Field survey 2010

Only 50 people out of the 53 questionnaires collected gave their responses on this question.

30% of our respondent use the investment method of valuation frequently in their P&M

valuation, 60% said they use it rarely while 10% do not use the investment method at all in

their P&M valuation. Hence an inference can be drawn here that investment method of

valuation is rarely used in P%M valuation.

Table 4.92 Frequency of use of the direct comparison method

45
 options Cumulative

Frequency Percent Percent

frequently 29 59.2 59.2

rarely 18 36.7 95.9

not used 2 4.1 100.0

Total 49 100.0

Source: Field survey 2010

49 respondents out of the possible 53 gave their opinion on the frequency of use of the direct

comparison method. 59.2% use the method frequently in relation to P&M valuation, 36.7%

use it rarely while only 4.1% do not use it at all. It can then be suspected that the direct

comparison is also frequently used in the valuation of plant and machinery.

Table 4.93 Frequency of use of the profit test method

46
 options Cumulative

Frequency Percent Percent

frequently 4 8.3 8.3

rarely 13 27.1 35.4

not used 31 64.6 100.0

Total 48 100.0

Source: Field survey 2010

Out of 48 respondents who gave their opinion, only 8.3% use the profit method frequently,

27.1% would rarely use the method while 64.6% would not use the method. It can then be

inferred that the profit method is majorly not used by valuers when carrying out plant and

machinery valuation exercise.

Table 4.94 Frequency of use of indexation method

47
 options Cumulative

Frequency Percent Percent

frequently 11 25.0 25.0

rarely 17 38.6 63.6

not used 16 36.4 100.0

Total 44 100.0

Source: Field survey 2010

From the above table 25% of respondents use indexation method frequently, 38.6% use it

rarely and 36.4% do not use the method at all. It can then be inferred that the indexation

method is rarely used in P&M valuation by surveyors.

Table 4.95 Methods most suitable for plant and machinery valuation

48
 options Cumulative

Frequency Percent Percent

cost method 32 60.4 60.4

direct comparison 16 30.2 90.6

scrap/salvage value 3 5.7 96.2

analysis

income approach 1 1.9 98.1

Profit method 1 1.9 100.0

Total 53 100.0

Source: Field survey 2010

From the above data, the cost method has 60.4%, the direct comparison method has a 30.2%,

scrap/salvage value analysis has 5.7%, while income& profit method shares the same

percentages of 1.9% each. Hence it can be inferred that the cost method is the most suitable

for the valuation of plant and machinery.

Table 4.96 Reason(s) for the suitability of use of methods

49
 options Cumulative

Frequency Percent Percent

logicality 9 17.0 17.0

transparency 12 22.6 39.6

objectivity 4 7.5 47.2

convenience 9 17.0 64.2

logicality&objectivity 5 9.4 73.6

transparency&convenie 4 7.5 81.1

nce

logicality,transparency 5 9.4 90.6

&objectivity

logicality,transparency 5 9.4 100.0

&convenience

Total 53 100.0

From the above data respondents who think logicality is the reason for the choice of method

constitute 17.0 of the whole sample. Those who think transparency is the reason for the

choice of method constitute 22.6%.where as those whose choice of method is triggered by

objectivity of the method in question constitute7.5%. Convenience as a reason for the choice

of method is 17% while other reasons like logicality&objectivity, transparency&convenience,

50
logicality,transparency&objectivity, and logicality,transparency&convenience are 9.4, 7.5%,

9.4%, 9.4% respectively. It can then be inferred that transparency of method is the major

reason for the choice of valuation method in P&M valuation.

Table 4.97 Awareness on the concept of depreciation and obsolescence

options Cumulative

Frequency Percent Valid Percent Percent

yes 53 100.0 100.0 100.0

All responds are quite aware of the concept of depreciation and obsolescence and as a result a

percentage 100 is given here. It can thus be inferred that the perception of the respondent

would represent that of a knowledgeable man with regards to depreciation and obsolescence

in plant and machinery valuation.

Figure 4.2: The degree of importance of wear and tear in plant and machinery

valuation

51
 80
70
60
50
40
30
20
10
0
very important
important

The diagram above represents the importance attached to wear and tear by valuers in P&M

valuation. About 80% of respondent valuers see the issue of wear and tear very important

and even the remaining 20% see it as important. It can then be inferred that all valuers see the

issue of tear and wear in P&M valuation as very important.

Figure 4.3 degree of importance of physical deterioration in P&M valuation

52
 60

50

40

30

20

10

0
veryimportant important

The diagram above represents the importance attached to wear and tear by valuers in P&M

valuation. About 60% of respondent valuers see the issue of physical deterioration very

important and the remaining 40% see it as important. This connotes that the issue of physical

deterioration is very important in P&M valuation.

Figure 4.4

53
 degreeof importanceof functional
obsolscencein P&M valuation

80
60
40
20
0
veryimportant important i don't know

From the above analysis above 30% of respondents see functional obsolescence as very

important, however 62% see it as just important while the remaining 8% see it as not

important. Then it can be inferred that majority of surveyors perceive functional obsolescence

as important and not very important in their valuation.

Figure 4.5

54
 degreeof importanceof economic
obsolescencein P&M valuation

80
60
40
20
0
very important not i don't know
important important

The figure above gives the diagrammatic representation of valuers perception in the

study area on economic obsolescence .only 20.8% opined that economic obsolescence

is very important,5.7% only see it as important. The highest proportion of respondent

don’t see the consideration of economic obsolescence in P&M valuation as important.

It can however be inferred that majority of valuers do not consider economic

obsolescence as important in their valuation.

Table 4.9.8 Degree of importance of technological obsolescence in P&M valuation

55
 options Cumulative

Frequency Percent Percent

very 15 30.0 30.0

important
important 31 62.0 92.0
i don't know 4 8.0 100.0
Total 50 100.0

From the above statistics we can see that 15% of valuers see technological obsolescence as

very important, 31% see it as important while 4% do not know whether it is important or not.

It can however be inferred that the majority of surveyors admit the importance of

technological obsolescence in P&M valuation.

Table 4.9.9 Perception of valuers on the importance of the determination of

depreciation in P&M valuation

56
 options Cumulative

Frequency Percent Percent

very 29 54.7 54.7

important
important 18 34.0 88.7
not important 6 11.3 100.0
Total 53 100.0

From the above table it is obvious that 54.7% of the respondents perceive the determination

of depreciation as very important, 34% see this as important while 11.3% see as not

important. Hence it can be inferred that more than half of the total population of surveyors

perceive the determination of depreciation in P&M valuation very important.

Figure 4.6

57
From the figure above statistics 60.4% of respondent perceive that the assessment of

obsolescence is a very important issue in plant and machinery valuation, 24.5% opined that it

is important, while 9.4% perceive that the assessment of obsolescence is not important. Very

few percentage of 5.7% don’t know the importance of the assessment of the level of

obsolescence when carrying out plant and machinery valuation. It can thus be inferred that

valuers perceive the determination of obsolescence as very important when carrying out

P&M valuation.

58
Table 4.9.9.1 Perception of valuer on the reliability of methods adopted in P&M

valuation

options Cumulative

Frequency Percent Percent

very 17 32.1 32.1

important
important 33 62.3 94.3
not important 3 5.7 100.0
Total 53 100.0

The above table shows that 32.1% of the respondents perceive the reliability of methods

adopted in P&M valuation as very important, 62.3% see it as important while 5.7% opined

that it is not important. Hence it can be inferred that majority of valuers perceive the

reliability of methods adopted as important.

Table 4.9.9.2 Degree of importance of valuer’s judgments

59
 options Cumulative

Frequency Percent Percent

very 35 66.0 66.0

important
important 18 34.0 100.0
Total 53 100.0

From the above statistics we can see that 66% of respondents perceive the valuer’s judgment

as a very important factor in P&M valuation. Another 34% perceive this issue as important.

It can then be inferred that surveyors perceive the valuer’s judgment as a very important

factor in P&M valuation.

Table 4.9.9.3 Perception of valuers on the degree of importance of information given by

the client in P&M valuation

Cumulative

Frequency Percent Percent

very 14 26.4 26.4

important
important 26 49.1 75.5
not important 10 18.9 94.3
i don't know 3 5.7 100.0
Total 53 100.0

From the above statistics 26.4% of respondent perceive that the information given by client

is very important in P&M valuation, 49.1% opined that it is important, while 18.9% perceive

that this is not important. It can thus be inferred that valuers perceive the information given

by their client as important when carrying out P&M valuation.

Table 4.9.9.4 Respondents’ opinion on whether depreciation is a loss of value due to

wear and tear only

60
 options Cumulative

Frequency Percent Percent

strongly agree 14 26.4 26.4
agree 5 9.4 35.8
disagree 16 30.2 66.0
strongly disagree 18 34.0 100.0
Total 53 100.0

The above table shows the percentages of respondents expressing their opinion on whether

depreciation is a loss of value due to wear and tear only. 26.4% of respondents strongly

agree, another 9.4% agree that it is while 34% strongly disagree. It can however be inferred

that more than half of the sampled respondent think that depreciation is a loss of value due to

wear and tear only.

Table 4.9.9.5 Respondents’ opinion on whether obsolescence is simply a condition of

physical deterioration

options Cumulative

Frequency Percent Percent

strongly agree 6 11.3 11.3
agree 8 15.1 26.4
disagree 26 49.1 75.5
strongly disagree 12 22.6 98.1
undecided 1 1.9 100.0
Total 53 100.0

The above table shows the percentages of respondents expressing their opinion on whether

obsolescence is simply a condition of physical deterioration. 11.3% of respondents strongly

agree, another 15.1% agree that it is while 49.1% disagree. Another proportion of 22.6%

strongly disagree while 1.9% of the respondent was undecided. It can however be inferred

61
that majority of valuers disagree that obsolescence is simply a condition of physical

deterioration.

4.9.9.6 Respondents’ opinion on whether obsolescence is much more than physical

deterioration

Cumulative

Frequency Percent Percent

strongly agree 29 54.7 54.7
agree 22 41.5 96.2
disagree 1 1.9 98.1
undecided 1 1.9 100.0
Total 53 100.0

This table is showing the responses of how responding valuers see obsolescence. 54.7% of

them strongly agree that obsolescence id much more than physical deterioration. 41.5 %

further agree that it is more than physical deterioration and just 1.9% of respondents disagree

while another 1.9% remains undecided.

62
Figure 4.7

The figure above is a representation of respondents’ opinion on whether functional and

technological is the same thing. 9.43% strongly agree that they are the same thing . 41.51%

agree that they mean the same while 28.30 disagree. The percentage of those that strongly

disagree is 18.87% and an insignificant number of respondents totaling 1.89% are undecided.

From this analysis we can infer that more than half the proportion of respondent are of the

opinion that technological and functional obsolescence are the same thing.

63
4.9.9.7 Respondents’ opinion on whether economic obsolescence is the same as external

obsolescence

options Cumulative

Frequency Percent Percent

strongly agree 5 9.4 9.4
agree 18 34.0 43.4
disagree 14 26.4 69.8
undecided 16 30.2 100.0
Total 53 100.0

From the table above, only 9.4% of respondents strongly agree that economic obsolescence

and external obsolescence are the same. 34.0% agree that they are the same while 26.4% and

30.2% disagree and undecided respectively. It can however be inferred that concept of

economic obsolescence seem to be the least understood of all the concept of obsolescence.

Figure 4.8 Respondents’ opinion on whether depreciation is a loss of value due to

any cause

64
 60

50

40

30

20

10

0
strongly agree disagree strongly undecided
agree disagree

The statistics above shows 56.6% strongly agree that depreciation is a loss of value due to

any course. Another 30.2% agree that it is a loss of value due to any cause, while 5.7%

disagree. The percentage of respondents who strongly disagree is 1.9% and another 5.7% of

the total respondents remain undecided. From this we can infer that majority of valuers have

a good understanding of the fact that depreciation can be a loss of value arising from any

cause.

Table 4.9.9.8 Respondents classification of loss of value due to change in

technology

65
 options Cumulative

Frequency Percent Percent

technological 47 88.7 88.7

obsolescence
functional obsolescence 5 9.4 98.1
economic obsolescence 1 1.9 100.0
Total 53 100.0

From the table above 88.7% of respondent classify loss of value due to change in technology

as technological obsolescence, 9.4% of the respondent classify it as functional obsolescence

while 1.9% of the respondent classify it as economic obsolescence. It can therefore be

inferred that the respondents have a good understanding of technological obsolescence.

Table 4.9.9.9 Respondents’ classification of loss of value due to reduction in demand for

the product produced by the machine

66
 options Cumulative

Frequency Percent Percent

technological 1 1.9 1.9

obsolescence
functional obsolescence 14 26.4 28.3
economic obsolescence 38 71.7 100.0
Total 53 100.0

It can be shown above the loss of value due to reduction in demand for the product produced

by a machine is classified as technological obsolescence by 1.9% of the respondents, 26.4%

classified as functional, while the highest proportion of respondents classify it as economic

obsolescence. It can thus be inferred that economic obsolescence is easily recognizable in

plant and machinery valuation when it emanates from the demand for the product produced

by the plant or machinery.

Table 4.9.9.9.1 Respondents’ classification of loss of value due to change in legislation

in the industry employing the services of the plant or machinery

67
 options Cumulative

Frequency Percent Percent

technological 3 5.7 5.7

obsolescence
functional obsolescence 12 22.6 28.3
economic obsolescence 35 66.0 94.3
undecided 3 5.7 100.0
Total 53 100.0

5.7% o classify a loss of value of a machine which arises from a change in legislation in the

industry employing the service(s) of machine as technological obsolescence. Another 22.6%

classify it as functional obsolescence while the largest proportion of respondents classifies it

as economic. A fraction of the respondents which amounts to 5.7% however remain

undecided. It can however be inferred that obsolescence factor which arises as a result of

legislation is not easily classified like other obsolescence which emanate from the machine

itself.

4.9.9.92 Respondents’ classification of loss of value due to decreased productivity of the

machine

68
 options Cumulative

Frequency Percent Percent

technological 1 1.9 1.9

obsolescence
functional obsolescence 43 81.1 83.0
economic obsolescence 9 17.0 100.0
Total 53 100.0

From the above statistics, 1.9% classify loss of value due to decreased productivity of a

machine as technological obsolescence, another 17.0% classify it as economic while a very

significant proportion of respondents (81.1) classify it as functional obsolescence. It can

however be said that respondents have a good perception of functional obsolescence.

CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary of findings

69
 • The average qualification of practicing estate surveyor is either Bsc/HND or

both,

• Most estate surveyors belong to NIESV along with only a small proportion

belonging to other affiliated professional bodies.

• Most estate firm has an average staff number of between 6-10 with an average of

between 1-5 surveyors as NIESV member.

• A large proportion of estate surveyors attend training programmes often.

• This study reveals that majority of estate firms specializes in all aspect of real

estate profession apart from development as only very few firms are into property

development

• There is a need for practicing surveyors to thoroughly understand the concept of

obsolescence especially those that emanate form factors exogenous to the machine.

• The field of plant and machinery is valuation is one of the most challenging in the

valuation discipline

• The basic understanding of the concept is not independent of the technical knowledge

of the concept because; a even a competent plant and machinery

• valuer must be analytical and speedy in capturing critical issues in his valuation

undertakings. This requires both technical and economic knowledge of the subject of

plant and machinery valuation.

70
 • The study also reveals that despite the specialized nature of plant and

machineries, the direct comparison is still widely adopted frequently by practicing

valuers to arrive at an opinion of value.

• It is revealed that valuers give more importance to wear and tear and physical

deterioration than various obsolescence factors when carrying out plant and

machinery valuation

• The study reveals that transparency is the over-riding factor that determines the

choice of method of valuation, while logicality and convenience associated with the

method ranks next to it.

• There is a conceptual understanding of depreciation and obsolescence to a

large extent among surveyors but how ever the technical understanding is still

lacking among most surveyors

• This study equally reveals that most surveyors perceive their judgments as

very important and an over-riding factor than all other underlying issues in

plant and machinery valuation.

• Economic obsolescence is the least understood in its technical sense among 1

practicing surveyors.

5.2 Conclusion

71
This study has identified valuers’ perception of depreciation and obsolescence and

also evaluated their level of understanding on the subject matter. Method of valuation

used by valuers were also found to depend largely on the transparency of the method

will in turn be dependent on the valuer’s judgment in other to arrive at an opinion of

value. Many valuers give the most consideration to physical deterioration and wear/

tear without taking into consideration some or all of the various obsolescence factors.

It is also revealing to know that direct comparison and investment method of

valuation are more frequently used than indexation which is theoretically ideal for the

valuation of plant and machinery.

5.3 Recommendations

The following recommendations aim at ensuring a better perception and

understanding of valuers in the concept of depreciation and obsolescence with a view

to increase the reliability of value opinion given by the valuer.

• They should develop and equip themselves with contemporary issues that

borders on plant and machinery valuation and also try and relate what they

have learnt in school to practice.

• They should acquire skill, patience and also be analytical so that critical

issues such as the determination and quantification of obsolescence will not be

overlooked

72
• In other to determine the level of depreciation and obsolescence, valuers

should equip themselves with contemporary methods of valuation of plant and

machinery.

• Valuers should learn to engage the services of an expert in a particular type of

industry and manufacturing.

73