Depreciation due to Deterioration of Plants & Machines

Depreciation It is the usual wear and tear caused by the normal working of any asset, its use is liable to a certain amount of deterioration despite the care and attention bestowed on its maintenance and preservation.

Physical depreciation is broken down into curable and incurable

Curable Depreciation

The following input for machinery under consideration by technical personnel of clients helps in estimating curable depreciation.

(i) Did the equipment undergo major repair or reconditioning?

(ii) Did the equipment undergo capability test?

(iii) What is the present condition in terms of production rate and accuracy vis-à-vis the original at the time of purchase?

Curable depreciation is fixable by refurbishing, rebuilding of the equipment

Physical Incurable Depreciation

Physical depreciation is caused from age, wear and tear, fatigue, exposure to the elements or lack of maintenance. Overall physical depreciation is caused more by use rather than age.

A visual inspection can help to assess present condition of the machine

General Upkeep:

If an equipment is well-maintained during its service life and is expected to operate longer with lower costs, its value may be higher than expected for a machine of its age.

Dirt, dust, and other contaminants can interfere with lubrication and cause abrasive wear on the surfaces of the rotating equipment. This can also lead to increased friction, leading to increased heat, and damage to seals, bearings, and other components. Contamination can also lead to corrosion and oxidation, which can cause parts to degrade and fail prematurely. Additionally, contaminants can interfere with the flow of fluids, cause bearing failure, cause pressure spikes, block lubricant pathways, and reduce equipment efficiency.

Observed deterioration (also known as the 0 – 100% method)

 Lump sum figure of depreciation can be adopted as given below:

 Condition                                                        Depreciation %

New (N)                                                            0 - 5

Excellent (E)                                                    6 - 10

Very Good (VG)                                              11 - 20

Good (G)                                                         21 - 50

Fair (F)                                                            51 - 70

Poor (P)                                                           71 - 90

Scrap (S)                                                          91 - 100

If upkeep and maintenance are high, then the effective age will be lower than the actual age and conversely if upkeep and maintenance have been low then the effective age will be greater than the actual age.

As one of the important obsolescence factors considered by the cost approach, physical deterioration influences the conclusion of value.

Reference Document: STANDARDS ON VALUATION OF PLANT, MACHINERY AND EQUIPMENT; Publisher: Centre for Valuation Studies, Research & Training Association, India

 The above interpretation is absolutely personal in nature and is not binding on any individual or organization in particular.