Valuers' Perception of Depreciation and Obsolescence in Plant and Machinery Valuation

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 combi nation with other items to enhan enhance ce the productivity productivity or operat operating ing facility; and inclu includes des 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 (Budh bhatti 1999). 1999). Valua Valuation tion of Plant and Machinery is an important and very interesting 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 machi machinery nery collectively collectively const constitute itute a genera generall 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 ov er th thee ma majo jori rity ty of pr prod oduc ucti tion on fu func ncti tion onss pr prev evio ious usly ly pe perf rfor orme med d by me men, n, it be beco come mess 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 & machi machinery nery may be required will inclu include de insur insurance, ance, financial 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 depreci dep reciated ated replaceme replacement nt cos costt (DR (DRC) C) for short. short. Th This is is not just a mer meree coi coinci nciden dence ce 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 de depr prec eciat iatio ion n an and d ob obso sole lesc scen ence ce fa fact ctor orss wi with thin in th thee co cont ntex extt of pl plan ant, t, ma mach chin inery ery an and d equipment valuation among practicing Estate Surveyors and Valuers in Lagos metropolis. 1.2

Sta St ate teme ment nt of the the res eseear arcch pro probl bleem

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 chal ch alle leng ngin ing g as aspe pect ct of th thee va valu luat atio ion n pr prof ofes essi sion on,, es espe peci cial ally ly wh when en th ther eree ar aree no ma mark rket et compar com parabl ables es for the sub subject ject ass asset. et. Con Conseq sequen uently tly,, the val valuer uer res result ultss int into o usi using ng the cos costt appr ap proa oach ch wh which ich is of ofte ten n su subj bject ect to th thee va valu luer’ er’ss un unde ders rsta tand ndin ing g of de depr preci eciat atio ion n an and d obsolescence in arriving at a reliable market value. The identification and quantification of    physi physical, cal, fun functio ctional nal and eco econom nomic ic obs obsole olesce scence nce is an imp import ortant ant pro proced cedure ure in any cos costt 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 enco en comp mpas asse sess all fo form rmss of ob obso sole lesc scen ence. ce. Th This is co cont ntro rove vers rsy y on th thee cl clas assi sific ficat atio ion n an and d 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 diff di ffer eren entt

valu va luer erss

perc pe rcei eive ve

depr de prec ecia iati tion on

and an d

obso ob sole lesc scen ence ce,,

itss it

dete de term rmin inat atio ion n

and an d

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. 1.3Research 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 Ho w do va valu luers ers se seee ot othe herr fo form rmss of ob obso sole lesc scen ence ce as di diff ffere erent nt fr from om ph phys ysic ical al deterioration?

•

What is the distinction distinction between depreciation and other obso obsolescen lescence ce factor factorss in plant and machinery valuation?

•

What Wh at is th thee di diff ffer eren ence ce be betw twee een n te tech chno nolo logi gica call ob obso sole lesc scen ence ce an and d fu func ncti tion onal al obsolescence in plant and machinery valuation?

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1.40 1. 40

Aim Ai m and and ob obje ject ctiv ives es of th thee res resea earc rch h

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 1. 42

Obje Ob ject ctiv ives es to to the the aim aim of th thee res resea earc rch h

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 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 app apprais raiser’s er’s int intuit uition ion and sub subject jective ive jud judgme gment nt in acc accord ordanc ancee wit with h so some me lai laid d do down wn  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 questi que stioni oning ng reg regard arding ing val value ue opi opinio nion n giv given en by pro profes fessio sional nal est estate ate sur survey veyors ors and val valuer uerss especia esp ecially lly whe when n the their ir com comput putatio ation n has to do wit with h dep depreci reciatio ation n and obsolesc obsolescenc encee in the depreciated cost approach (DRC).It is shocking to know that even among practising surveyors 5

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 creatin crea ting g a com commo mon n gro ground und for acco account unting ing for obs obsole olesce scence nce amo among ng acad academi emician cianss 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 metr me trop opol olis is.. Th Thee st stud udy y wi will ll de deal al ba basi sica call lly y wi with th ev eval alua uati ting ng th thee va valu luers ers’’ pe perc rcep epti tion on of  depreci dep reciatio ation n and ob obsol solesc escenc encee as it con concer cerns ns pla plant nt and mac machin hinery ery val valuat uation ion.. Val Valuer uerss 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 encountere encountered d

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

were skipped on several occasions. Administration problems:

Some So me of th thee res respo pond nden ents ts wer weree ei eith ther er in indi disp spos osed ed or ve very ry

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 ent entity ity inc includ luding ing spe specia cialize lized d non per perman manent ent bui buildi lding: ng: mac machin hinery ery (in (indiv dividu idual al 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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deterio det eriorati ration on,, fun functio ctional nal obs obsole olesce scence nce and eco econom nomic ic obs obsole olesce scence nce in ord order er 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 Obsolescence:: This refers to the impairment of desirability of useful life

aris ar isin ing g fr from om fa fact ctor orss ex exte tern rnal al to th thee pr prop oper erty ty,, su such ch as ec econ onom omic ic fo forc rces es 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 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 techn tec hnol olog ogy y ha hass de deve velo lope ped. d. Sy Symp mpto toms ms su sugg gges esti ting ng th thee pr pres esen ence ce of fu func ncti tion onal al obsolescen obso lescence ce are exces excesss operating operating cost, excess constructi construction, on, (excess capital capital cost) over capacity, inadequacy, lack of 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 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  situat sit uation ionss req requir uiring ing ski skillf llful ul ass assess essmen mentt of the uti utilit lity y of the pro proper perty ty val valued ued and care careful ful 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 owners own ership hip.. Hen Hence ce the cha charact racteri eristic sticss of the these se cate categor gories ies of pro proper perty ty sho should uld be put into 10

considerati consi deration on when valuing plant and machi machinery. nery. Many plant and machin machinery ery value valuers rs find it very ver y cha challe llengi nging ng as it may req requir uiree the app applic licatio ation n of sev several eral kno knowle wledge dge,, ran rangin ging g fro from m 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 inc ome or wit with h inc income ome po poten tentia tial. l. Ifed Ifedior ioraa (20 (2004) 04) pointed pointed out tha thatt pla plant nt and mac machin hinery ery 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 val uer of pla plant nt and machiner machinery y sh shoul ould d ho howev wever er be read ready y to fac facee the brain tas taskin king g and multif mul tifacet aceted ed dis discip ciplin linee of thi thiss asp aspect ect of val valuat uation ion.. Ote Otegbu gbulu lu (20 (2006) 06) ack acknow nowled ledge ge 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 analyt analytical ical and quick to captu capture re the critical issu issues es in his valuation valuation unde undertakin rtaking. g. 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   prac practi tice. ce. He Henc ncee ex excl clus usiv ivee ex expo posu sure re an and d im impl plie ied d fa fami mili liari arity ty to Va Valu luati ation on of Pl Plan antt & 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 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 2. 1

Over Ov ervi view ew of pl plan antt and and ma mach chin iner ery y val valua uati tion on

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 moveable equipment, equipment, in addition to other forms of fixed asset like land, building building and installed plant and machinery. However Budhbhatti, (1999) summarized plant and machinery of an enterprise to include all devices dev ices in fix fixed ed or mov moveab eable le for form m oth other er tha than n real est estate ate,, dep deploy loyed ed in man manufa ufactu cturin ring, g, 12

  proce processi ssing ng or ass assemb embly ly of pro produc ducts ts fro from m the sta stage ge of raw mat materi erials als to fin finish ished ed goo goods. ds. 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 Valuat Val uation ion Sta Standa ndards rds in 200 2004 4 Com Commit mittee tee su summa mmarize rized d the cha charact racteri eristic sticss of pla plant nt and machinery as tangible assets that: (a) Are held for use in the production production or supply of goods goods or services, for rental to others, or for administrative purposes. (b) Are expected to be used during more than one period. 2.2 2. 2

Type Ty pess of of pla plant nt,, mac machi hine nery ry an and d equ equip ipme ment nt va valu luat atio ion n

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 13

(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.

(Ote (O tegb gbul ulu, u,20 2006 06)) an and d Ku Kuye ye (2 (200 009) 9) sa said id th that at th thee va valu luee of pl plan antt an and d ma mach chin inery ery wi will ll 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 2. 3

Conc Co ncep epts ts of va valu luee in in pla plant nt an and d mac machi hine nery ry va valu luat atio ion n

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 specifi spe cificc dat datee and ass assumi uming ng tha thatt the Con Contin tinued ued Use bu busin siness ess earn earning ingss su suppo pport rt the val value ue 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 amou am ount nt in inclu clude dess all no norm rmal al di dire rect ct an and d in indi dire rect ct co cost sts, s, su such ch as in inst stal alla lati tion on an and d ot othe her  r  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. 15

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 hig highes hestt pri price ce 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 act acting ing pru pruden dently tly,, kno knowle wledge dgeabl ably y and ass assumi uming ng the pri price ce is not affected affected by und undue ue 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 compo component nent of the whole property property that is retired from service 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 2. 4

Purp Pu rpos oses es of pl plan antt and and ma mach chin iner ery y val valua uati tion on

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 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 new:: Th There ere are sit situat uation ion whe where re mac machin hinee / pla plant nt is wor workin king g sat satisf isfacto actorily rily

 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 value method: 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) Depreciat Depreciation ion 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 of va valuation

Virtua Vir tually lly all pla plants nts and mac machin hinery ery val valuat uation ion use usess the thr three ee bas basic ic tra tradit dition ional al met method hodss 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 co cost ap approach (D (DRC)

(b)) (b

The ma mark rket et co comp mpar aris ison on ap app pro roac ach h

(c )

The in income ap 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 econom eco nomic ic the theory ory of su subst bstitu itutio tion. n. Lik Likee the oth other er val valuat uation ion app approa roache chess lis listed ted abo above, ve, it involves comparing the asset being valued with another. However, DRC is normally used in situations situa tions where there is no direct directly ly comp comparable arable alternative. alternative. The comparison comparison theref therefore ore 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 acquir acquiring ing an equiv equivalent alent new one. The technique involves involves assessing all the costs of    pro provi vidi ding ng a mo mode dern rn eq equi uiva valen lentt as asse sett us usin ing g pr prici icing ng at th thee da date te of va valu luat atio ion n (R (RIC ICS, S, 2007). 200 7).Thi Thiss view is sup suppor ported ted by

Kwong Kwo ng and Montes Montes Jr (2003) (2003) in their view on cost

approach as the cost to reproduce or replace in new condition the assets appraised in accord acc ordanc ancee wit with h cur curren rentt mar market ket pri prices ces for sim simila ilarr ass assets ets,, wit with h allo allowan wance ce for acc accrue rued d depreciation arising from condition, utility, age, wear and tear, or obsolescence present, taking into consideration past and present maintenance policy and rebuilding history.

18

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 adjust adj usted ed for los losses ses in val value ue due to phy physic sical al dep depreci reciatio ation, n, fun functio ctional nal ob obsol solesce escence nce,, 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 estim ation of allowa allowance nce for depre depreciation ciation.. Sayce and Connellan as cited in Kuye (2009) also support supp ort this opini opinion on by statin stating g that “determinatio “determination n of the appro appropriate priate rate of depreciation depreciation is important in the application of the DRC method. Income approach

Inco In come me ap appr proa oach ch is ba base sed d on th thee pr pres esen entt va valu luee of ca cash sh fl flow ow th that at an as asse sett ca can n be expected expect ed to generate generate during its its remaining remaining life. This This approach approach is based based on a forecast 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, Schrei ner, (2009) is of the opinion that the most widel widely y used and accepted approach approach is the markett appro marke approach. ach. This approach approach considers prices recently recently paid (or currently asked) asked) for  similar items with adjustments made to indicated market prices to reflect certain conditions of the comparab comparables les in con contras trastt to the subject subject ite items. ms. Thi Thiss app approa roach ch is app approp ropriat riately ely 19

employ emp loyed ed whe when n val valuin uing g ass assets ets whi which ch are com common monly ly bou bought ght and sol sold d in arm arm's 's len length gth 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 2. 6

Iden Id enti tifi fica cati tion on of pl plan antt an and d ma mach chin iner ery y

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 how howeve everr clas classif sified ied the ide identi ntifica ficatio tion n of pla plant nt and mac machin hinery ery int into o the fol follow lowing ing two categories: (a )

Micro-identification

(b)

Macro-identification

2.6. 2. 6.1 1

Micr Mi croo-Id Iden enti tifi fica cati tion on

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 20

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 Referen ce to any spec special ial found foundations ations,, servic servicing ing conne connection ctionss like wiring contr controls, ols,  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

PURCHASE

DEPRECIATION

DRC

REMARK  

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 21

•

How the plant is manufactures

•

What the capacity of the plant is

Source: Alico, 1986 A lis listt of inf inform ormati ation on to be con consid sidere ered d wh when en gat gather hering ing dat dataa for macro ide identi ntifica ficatio tion n 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

•

2.7 2. 7

General condition of plant and components

Conc Co ncep eptt of of dep depre reci ciat atio ion n and and obs obsol oles esce cenc ncee

Otegbulu Otegb ulu (2008) describes depreciation depreciation has a loss not restored by curren currentt maint maintenance enance due to al alll fa fact ctor orss cau causi sing ng ul ulti tima mate te re reti tirem rement ent of an as asse set, t, su such ch as we wear ar an and d te tear ar,, de decay cay,, inadequacy, and obsolescence. 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 Manage ment Agenc Agency y SAMA SAMA (2006) (2006) agrees with this view by sayin saying g that depreciation depreciation is a loss in utili utility ty and hence value from any cause. Similarly, Similarly, accrued depreciation depreciation is defin defined ed 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.

Thee co Th conc ncep eptt of de depr prec ecia iati tion on wi with thou outt do doub ubtt is ca card rdin inal al in th thee us usee of th thee de depr preci eciat ated ed 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 chang es in demand, in design design or in the art, and other technical technical or legal changes, 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 deterioratio deteri oration, n, functi functional onal obso obsolescen lescence ce and thatt the tha there re are thr three ee bro broad ad

economic econo mic obso obsolescen lescence. ce. He equall equally y identi identified fied

approa app roache chess to the est estima imation tion of dep depreci reciatio ation. n. The These se thr three ee

approaches are •

depreciation are physical

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 deteriorat deterioration ion

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 inappropri inapp ropriate ate to determine the effect of phys physical ical deterioration deterioration on value depreciation depreciation only in  purely mechanistic terms. Functi unctional onal obsole ob solescen scence ce

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  acces ac cesso sori ries es,, or an any y ot othe herr al alli lied ed fa facto ctors rs.. IV IVSC SC,, (2 (200 004) 4) is of th thee tak takee th that at fu func ncti tion onal al obsole obs olesce scence nce ari arises ses whe where re the des design ign or spe specifi cificati cation on of the ass asset et no lon longer ger ful fulfil filss the functi fun ction on for whi which ch it was original originally ly des design igned. ed. It add added ed tha thatt in som somee cas cases es fun functi ctiona onall 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 obsolescenc obsolescencee

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, obsolescence, also know known n as external obsolescen obso lescence, ce, as a loss in value resulting resulting from adverse factors 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 over ov erall all ma mark rket et co cond ndit itio ions ns fo forr a pr prop opert erty. y. Fo Forr ex exam ampl ple, e, if th thee ou outp tput ut of a ma mach chin inee is superseded in the marketplace by output of a different material (for examples, fibreglass for 

28

metal or plast plastic ic for wood wood)) and the market no longe longerr absorbs the superseded 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 Introduction::

The purpose of this chapter is to examine various statistical approaches that have been explor exp lored ed in pre previo vious us stu studie diess wit with h a vie view w to for formul mulati ating ng an app approp ropriat riatee met method hodolo ologic gical al 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   probl problem, em, des descri cripti ption on of too tools ls req requir uired ed for inv invest estiga igatio tion, n, inc includ luding ing que questi stionn onnaire aire 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 th is wo work rk ba basi sica call lly y in invo volv lves es th thee st stud udy y of va valu luers ers’’ pe perce rcept ptio ion n an and d un unde ders rsta tand ndin ing g 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 des ign of thi thiss sam sample ple fra frame me is the fin financ ancial ial cos costs ts inv involv olved ed in ach achiev ieving ing con consid sidera erable ble coverage. covera ge. Consequently Consequently,, a decis decision ion is made to restric restrictt the respondents respondents to a manag manageable eable 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 valuer val uers) s) and col collec lected ted the them m at the app appoin ointed ted tim time. e. How Howeve ever, r, thi thiss met method hod amo among ng oth others ers 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 •

Counte Cou nterr che check ck que questi stion ons: s: to fin find d out if the res respon ponden dents ts are giv giving ing the cor correct rect 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.)

thiss inq inquir uires es abo about ut the res respon ponden dent’s t’s bac backg kgrou round, nd, and Firms// surv Firms surveyor eyorss deta details ils: thi description of service rendered and the frequency of their engagement.

(b.)

Surveyors’ approach to valuation and problems encountered : this section critically

examin exa mines es the var variou iouss met method hodss whi which ch val valuer uerss ado adopt pt whe when n carr carryin ying g out pla plant nt and machinery valuation. It also endeavors to find out which of the methods are the most adopte ado pted d and also exp explor lores es the reasons reasons for using such methods. methods. It wen wentt fur furthe therr to hammer on how valuers perceive depreciation and obsolescence and to what degree are they accounted for in plant and machinery valuation. (c.)

thiss sec sectio tion n Deprec Dep reciat iation ion an and d Obs Obsole olesce scence nce pla plant nt an and d mac machin hiner ery y val valuat uation ion:: thi 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

that, there are specific topics related The interview is semi-structured owing to the fact that, 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  briefl y with respondent respondent surveyors of select selected ed firms and some specific question question which the question questionnai naire re doe doess not covered covered wil willl be ask asked ed in oth other er to fur furthe therr asc ascert ertain ain 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 carryin carr ying g out analysis analysis.. Eac Each h of the stu study dy obj objecti ectives ves wil willl be ade adequa quatel tely y refl reflect ected ed 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 a pproaches 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.) e.t c.).. The var variab iables les for thi thiss stu study dy were mea measur sured ed mos mostly tly thr throug ough h rati rating ng and ran rankin king g  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 su such ch,, th this is st stud udy’ y’ss qu ques esti tion onna nair iree wa wass st stru ruct ctur ured ed to ref refle lect ct th thee st stud udy’ y’ss ob objec jecti tive ves, s, consequent upon which the supervisor carried out comprehensive review (construct validity). The questionnaire questionnaire was then exposed through through pilot study conducted conducted withi within n the study area to test for reliability. The pilot study involved 10 respondents, equally cutting across the study  population area.

34

3.8. 3. 8.1 1

Sour So urce cess of of Dat Data a Col Colle lect ctio ion n

The data gathered in the conduct of this research is the primary and secondary data. Primary Data: This was gathe gathered red mainly through ques questionn tionnaire aire admin administrati istration, on, perso personal nal

observatio obser vations ns and interv interviews. iews. This research work is an action researc research h 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 review which forms the bulk of this research work is based largely on secondary data.

35

CHAPTER FOUR 

4.0

Pres eseent ntat atio ion n an and an anal aly ysi siss of of da data

This chapter focuses on the analysis and discussion of findings that were obtained from the data generated through the struct structured ured questionnaire questionnaire and semi structured structured interv interview iew guid guidee 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 before use by way of examining for errors (numeric, (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 a t wh w hich pl p lant an a nd ma m achinery valuation are carried out

Depreciation and obsolescence

Perception 36

and

understanding

of  

depr de prec ecia iati tion on

and an d

obso ob sole lesc scen ence ce

in

 plant and machinery valuation Methods

Techniques used in carrying out plant and machinery valuation

Techni Tec hnical cal ass assist istanc ancee

Inform Inf ormati ation on

gather gat hered ed

from fro m

other  oth er 

 professional Source: Field survey 2010 4.1 4. 1

Pres Pr esen enta tati tion on an and d an anal alys ysis is of de desc scri ript ptiv ivee dat data a

Data Da ta th that at ar aree de desc scri ribe bed d in th this is work ar aree pr pres esen ente ted d as fo foll llow owss:

The

resspo re pond nden ents ts

aree ar

 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 lowestt percen lowes percentage(3 tage(3.8%) .8%) of the sample surve surveyed, yed, followed by those practi practising sing for abov abovee 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 1115 yea years rs form the highest highest per percen centag tagee of res respon ponden dent. t. It can then be inf inferre erred d tha thatt the there re responses will be borne out of experience. Tabl Ta blee 4.2 4.2

Aver Av erag agee acad academ emic ic qua quali lifi fica cati tion on of of sur surve veyo yors rs

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 Source: Field survey 2010

53

100.0

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 Freq Fr eque uenc ncy y Pe Perce rcent nt

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 Source; Field survey 2010

53

100.0

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 1120 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 5 th 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 espe es peci cial ally ly wh when en th thee ta targ rget etss se sett by fi firm rmss ar aree fa farr be beyo yond nd wh what at th thee ma mann-po powe werr ca can n accommodate. Tabl Ta blee 4.4 4.4

no.. Of no Of sur surve veyo yors rs el elec ecte ted d as as NIE NIESV SV me memb mber er in fi firm rmss

  No. No. Of sur survey veyors ors ele elected cted as NIE NIESV SV

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

53

100.0

Total 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%. Tabl Ta blee 4.5 4.5

Prof Pr ofes essi sion onal al bo bodi dies es af affi fili liat ated ed to by fi firm rmss

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

53

100.0

Total 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. Tabl Ta blee 4.6 4.6

Freq Fr eque uenc ncy y of pa part rtic icip ipat atio ion n in tr trai aini ning ng pro progr gram amme me by by fir firms ms

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

53

100.0

Total 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. Tabl Ta blee 4. 4.7 7

Firm Fi rmss ar area ea(s (s)) of sp spec ecia iali lisa sati tion on

options Freq Fr eque uenc ncy y Pe Perce rcent nt

Cumulative 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 studies&valuation

3

5.7

77.4

agency,management,co 7 nsultancy&valuation

13.2

90.6

agency 1 mangement,consultancy and development

1.9

92.5

management,feasibility 1 &viability studies&consultancy

1.9

94.3

valuation,consultancy& 3 development

5.7

100.0

Total

100.0

53

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 property development. Those 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 sh are of re resp spon onde dent ntss wi with th 5. 5.7% 7%.. Th Thee fir firms ms th that at sp spec ecial ialis ised ed on ag agen ency cy,, ma mana nage geme ment nt,, 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.

Tabl Ta blee 4.8 4.8

Firm Fi rmss tha thatt car carry ry ou outt pla plant nt an and d mac machi hine nery ry va valu luat atio ion n

response

Frequency

Percent

Cumulative Percent

Yes

48

90.6

90.6

No

5

9.4

100.0

Total 53 Source: Field survey 2010

100.0

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 deprec iation and obsolescence obsolescence will be borne more out of practi practice ce 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

Tabl Ta blee 4.9 4.9

Freq Fr eque uenc ncy y of use use of of cost cost met metho hod d in pla plant nt and and mac machi hine nery ry val valua uati tion on

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 f requently in P&M valuation and only 19.2% use it rarely. However there is none who doesn’t use cost method metho d of valuat valuation. ion. What can be inferred from this is that cost method is the most used by valuers when carrying plant and machinery valuation.

44

Table Tab le 4.9.1 4.9.1

Frequ Fr equenc ency y of use use of the the invest investmen mentt metho method d in P&M P&M valuat valuation ion

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

Percent

frequently 15 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 Tab le 4.9 4.92 2

Frequ Fr equenc ency y of of use use of the dir direct ect com compar pariso ison n meth method od

45

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

Percent

frequently 29 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.

Tabl Ta blee 4.93 4.93

Freq Fr eque uenc ncy y of us usee of th thee prof profit it tes testt meth method od

46

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

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.

Tabl Ta blee 4.9 4.94 4

Freq Fr eque uenc ncy y of of use use of in inde dexa xati tion on me meth thod od

47

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

Percent

frequently 11 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 Tab le 4.95 4.95

Metho Me thods ds most most sui suitab table le for for plan plantt and and mac machin hiner ery y valua valuatio tion n

48

options

Cumulative Freq Fr eque uenc ncy y Pe Perce rcent nt

Percent

cost method

32

60.4

60.4

direct comparison

16

30.2

90.6

val alu ue 3

5.7

96.2

income approach

1

1.9

98.1

Profit method

1

1.9

100.0

Total

53

100.0

scra sc rap p/s /sal alva vag ge analysis

Source: Field survey 2010 From the above data, the cost method has 60.4%, the direct comparison method has a 30.2%, scrap/ scr ap/sal salvag vagee val value ue ana analys lysis is has 5.7 5.7%, %, whi while le inc income ome& & pro profit fit met method hod sha shares res the sam samee  percentages  perce ntages of 1.9% each. Hence it can be inferre inferred d that the cost method is the most suitable suitable for the valuation of plant and machinery.

Table Tab le 4.9 4.96 6

Reason Rea son(s (s)) for for th thee suit suitabi abilit lity y of of use use of met metho hods ds

49

options

Cumulative Freq Fr eque uenc ncy y Pe Perce rcent nt

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

5

9.4

90.6

5

9.4

100.0

53

100.0

nce logicality,transparency &objectivity logicality,transparency &convenience Total

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 Tab le 4.97 4.97

Awaren Awa renes esss on the the conc concept ept of depr deprec eciat iation ion and and obso obsoles lesce cence nce

options

Cumulative Fre req que uenc ncy y Pe Perc rcen entt Va Vali lid d Per erce cent nt 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 .

Figuree 4.2: Figur 4.2:

The degr degree ee of of import importance ance of wear and tear in plant plant and mach machiner inery y 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. valua tion. Abou Aboutt 80% of respondent respondent valuers see the issue of wear and tear very important 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 Fig ure 4.3

degree deg ree of impo import rtanc ancee of phy physic sical al dete deterio riorat ration ion in in P&M P&M valua valuatio tion n

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. valua tion. Abou Aboutt 60% of respo responden ndentt valuers see the issue of physical deterioration 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 functional obsolscenceinP&M valuation 80 60 40 20 0 very importa portant

importa portant

i don 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 importanc portanceof economic obsolescenceinP&Mvaluation valuation 80 60 40 20 0 very important

importa rtant

not important

i don't know

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 important,5.7% % only see it as impor important. tant. The highe highest st prop proportion ortion of respo respondent ndent don’t see the consideration consideration of economic obsolescence obsolescence in P&M valuation as important. It ca can n ho howe weve verr be in infer ferred red th that at ma majo jori rity ty of va valu luer erss do no nott co cons nsid ider er eco econo nomi micc obsolescence as important in their valuation.

Table 4.9. 4.9.8 8

Degree Degr ee of impor importanc tancee of tech technolo nologica gicall obsoles obsolescenc cencee in P&M valua valuation tion

55

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

Percent

15

30.0

30.0

important

31

62.0

92.0

i don't know

4

8.0

100.0

Total

50

100.0

very important

From the above statistics we can see see that 15% 15% of valuers see technological obsolescence obsolescence as very important, 31% see it as important while 4% do not know whether it is important or not. It can ho howev wever er be in infe ferre rred d th that at th thee ma majo jori rity ty of su surv rvey eyor orss ad admi mitt th thee im impo port rtan ance ce of  technological obsolescence in P&M valuation.

Tabl Ta blee 4.9 .9.9 .9

Perce cept ptio ion n of va valu lueers on the im impo porrtan ance ce of the det eteermi mina nati tio on of 

depreciation in P&M valuation

56

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

Percent

29

54.7

54.7

18

34.0

88.7

not important 6

11.3

100.0

Total

100.0

very important important

53

From the above table it is obvious that 54.7% of the respondents perceive the determination of de depr prec ecia iatio tion n as ve very ry im impo porta rtant nt,, 34 34% % se seee th this is as im impo port rtant ant wh whil ilee 11 11.3 .3% % se seee as no nott 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 Fro m the fig figure ure abo above ve sta statis tistic ticss 60. 60.4% 4% of res respon ponden dentt per perceiv ceivee tha thatt the ass assess essmen mentt 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 fe w pe perc rcen enta tage ge of 5. 5.7% 7% do don’ n’tt kn know ow th thee im impo port rtan ance ce of th thee as asse sess ssme ment nt of th thee le leve vell 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 Perceptio Perception n of valuer on the reliability reliability of methods methods adopted adopted in P&M valuation

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

Percent

17

32.1

32.1

33

62.3

94.3

not important 3

5.7

100.0

Total

100.0

very important important

53

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 thatt it is tha

not impor importan tant. t. Hence Hence it can be inferred inferred that that majority majority of val valuer uerss perceive perceive the

reliability of methods adopted as important.

Table 4.9.9.2 4.9.9.2 Degr Degree ee of importanc importancee of valuer’s valuer’s judgment judgmentss

59

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

Percent

35

66.0

66.0

important

18

34.0

100.0

Total

53

100.0

very important

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 Perceptio Perception n of valuers on the degree of importance importance of information given by the client in P&M valuation

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

Percent

14

26.4

26.4

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

very important important

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. important. It can thus be inferre inferred d that value valuers rs perceive the infor informatio mation n given  by their client as important when carrying out P&M valuation. Table 4.9. 4.9.9.4 9.4 Resp Responde ondents’ nts’ opinion opinion on whether deprecia depreciation tion is a loss of value due to wear and tear only 60

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

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

100.0

53

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 another 9.4% agree that it is while 34% stron strongly gly disagree. 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. 4.9.9.5 9.5 Resp Responde ondents’ nts’ opinion opinion on whether whether obsolescence obsolescence is simply a cond condition ition of  physical deteriorat deterioration ion

options

Cumulative Freq Fr eque uenc ncy y Pe Perc rcen entt

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 th at ma majo jorit rity y of va valu luers ers di disa sagr gree ee th that at ob obso sole lesc scen ence ce is si simp mply ly a co cond ndit itio ion n of ph phys ysic ical al deterioration. 4.9.9.6 4.9. 9.6 Resp Responde ondents’ nts’ opinion on whet whether her obsolescenc obsolescencee is much more than phys physical ical deterioration

Cumulative Freq Fr eque uenc ncy y Pe Perce rcent nt

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 opinion on whether economic obsolescence obsolescence is the same as external obsolescence

options

Cumulative Freq Fr eque uenc ncy y Pe Perce rcent nt

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% 30. 2% dis disagr agree ee and und undeci ecided ded resp respecti ectivel vely. y. It can how howeve everr be inf inferre erred d tha thatt con concep ceptt of  economic obsolescence seem to be the least understood of all the concept of obsolescence.

Figu Fi gure re 4. 4.8 8

Resp Re spon onde dent nts’ s’ opin opinio ion n on wheth whether er depr deprec ecia iati tion on is a lo loss ss of valu valuee due to any cause

64

60 50 40 30 20 10 0 strongly agree

agree ree

disagree ree

stron rongly disagree

undecided

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

65

options

Cumulative Freq Fr eque uenc ncy y Pe Perce rcent nt

Percent

47

88.7

88.7

functional obsolescence 5

9.4

98.1

economic obsolescence 1

1.9

100.0

Total

100.0

technological obsolescence

53

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 whi le 1.9 1.9% % of the res respon ponden dentt cla classi ssify fy it as eco econom nomic ic ob obsol solesc escenc ence. e. It can the therefo refore re be inferred that the respondents have a good understanding of technological obsolescence.

Table 4.9.9.9 Respondents Respondents’’ classification classification of loss loss of value due to reduction in demand for for the product produced by the machine

66

options

Cumulative Freq Fr eque uenc ncy y Pe Perce rcent nt

Percent

1

1.9

1.9

functional obsolescence 14

26.4

28.3

economic obsolescence 38

71.7

100.0

Total

100.0

technological obsolescence

53

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 classi fied as funct functional, ional, while the high highest est proportion proportion of respondents respondents class classify ify it as economic obsolescence. It can thus be inferred that economic obsolescence is easily recognizable in  plantt and machinery  plan machinery valua valuation tion when it emanates from the demand for the product produced produced  by the plant or machinery.

Table 4.9.9.9.1 Respondent Respondents’ s’ classification classification of loss of of value due to change in legislation in the industry employing the services of the plant or machinery

67

options

Cumulative Freq Fr eque uenc ncy y Pe Perce rcent nt

Percent

3

5.7

5.7

functional obsolescence 12

22.6

28.3

economic obsolescence 35

66.0

94.3

undecided

3

5.7

100.0

Total

53

100.0

technological obsolescence

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 ec econ onom omic ic.. A fra fract ctio ion n of th thee res respo pond nden ents ts wh which ich am amou ount ntss to 5. 5.7% 7% ho howe weve verr rem remai ain n 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’ classificatio classification n of loss of value value due to decreased decreased productivity productivity of the machine

68

options

Cumulative Freq Fr eque uenc ncy y Pe Perce rcent nt

Percent

1

1.9

1.9

functional obsolescence 43

81.1

83.0

economic obsolescence 9

17.0

100.0

Total

100.0

technological obsolescence

53

From the above statistics, 1.9% classify loss of value due to decreased productivity of a machine machi ne as technological technological obsolescence, 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 RECOMMENDATIO RECOMMENDATIONS NS 5.1

Summary of findings

69

•

The ave averag ragee qua qualif lificat ication ion of pra practic cticing ing est estate ate sur survey veyor or is eit either her Bsc Bsc/HN /HND D or   both,

•

Most Mo st es estat tatee su surv rvey eyor orss be belo long ng to NI NIES ESV V al alon ong g wi with th on only ly a sm smal alll pr prop opor orti tion on  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 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

undertakin under takings. gs. This requi requires res both techn technical ical and econo economic mic know knowledge ledge  plant and machinery valuation .

70

valuation

of the subje subject ct of 

•

The st stud udy y al also so re reve veal alss th that at des esp pit itee th thee spec ecia iali lize zed d nat atu ure of pl plan antt an and d 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 deteri det eriorat oration ion than

variou var iouss obs obsole olesce scence nce factors factors whe when n carr carryin ying g out plant plant and

machinery valuation

•

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

choicee of metho choic method d of valua valuation, tion, while logica logicality lity and conve convenience nience assoc associated iated

with

the the

method ranks next to it.

•

Ther Th eree is a co conc ncep eptu tual al un unde ders rsta tand ndin ing g of

depr de prec eciat iatio ion n an and d ob obso sole lesc scen ence ce to a

large lar ge ext extent ent amo among ng sur survey veyors ors but how ever the tec techni hnical cal und unders erstan tandin ding g is sti still ll lacking among most surveyors

•

This Th is st stud udy y eq equa uall lly y re reve veal alss th that at mo most st su surv rvey eyor orss pe perc rcei eive ve th thei eirr ju judg dgme ment ntss as very ver y imp import ortant ant and an ove over-ri r-ridin ding g factor

than tha n all other other und underl erlyin ying g iss issues ues 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 value consideration to phys physical ical deterioration deterioration and wear/ tear without taking into consideration some or all of the various obsolescence factors. It is al also so rev reveal ealin ing g to kn know ow th that at di direc rectt co comp mpar aris ison on an and d in inve vest stme ment nt me meth thod od of  valuation are more frequently used than indexation which is theoretically ideal for the valuation of plant and machinery. 5.3

Recommendations

Thee fo Th foll llow owin ing g re reco comm mmen enda dati tion onss ai aim m at en ensu suri ring ng a be bett tter er pe perc rcep epti tion on an and d 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 The y sho should uld acquire acquire skill, skill, patience patience and also be analytica analyticall so that cri critic tical al issues such as the determination and quantification of obsolescence will not be overlooked 72

•

In oth other er to det determ ermine ine the lev level el of dep depreci reciatio ation n and obs obsole olesce scence nce,, val valuer uerss 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