Physical Depreciation Modelling In The Use Of Depreciated Replacement Cost For The Valuation Of Plant And Machinery

Perhaps the most challenging aspect of depreciated replacement cost valuation is that physical deterioration models popularly used in valuation (straight-line depreciation estimated percentage depreciation etc.) are premised on assumptions which do not accurately model the pattern that physical deterioration of plant and machinery follow over useful life. Moreover, the influence of various factors such as intensity of use, power outages, level of maintenance, and design among others on pattern of physical deterioration are not adequately included in depreciation modelling. The aim of the study was accordingly to accurately model physical deterioration in the use of depreciated replacement cost for the valuation of plant and machinery with a view to providing information that would enhance depreciated replacement cost valuation practice. The study sampled operators of plants and machinery in fourteen manufacturing firms, (two manufacturing firms each from seven manufacturing industries) to obtain data addressing the study’s aim. Data were analyzed using means, weighted means, linear regression, multiple linear regression and multiple log-log regression. It was found that the useful life of machinery fell between ten to fifteen years while the useful life of machinery fell between nineteen to twenty- two years. The pattern of physical deterioration was found to be initially flat in early years before assuming a convex upsweep pattern for both plant and machinery. The log-log beta coefficient results showed that increases in age, usage, power outage and fluctuation increased the level of physical deterioration of while increases in maintenance, operator’s years of experience and availability of spare parts reduced the level of physical deterioration. The study recommended the use of models formulated in this study to valuers for accurate estimation of physical deterioration in replacement of popular models.