APPRAISAL OF PLANT

MACHINERIES AND EQUIPMENT

Prepared for:
Comprehensive Real Estate Appraiser Seminar and Training (CREASAT) 2014
Ateneo de Naga University, Naga City on May 30,2014, 4:00pm-6:00pm
Sponsored by: Philippine Association of Realty Appraisers(PARA), Inc. / Philippine Real Estate Board, Inc. (PAREB)
 MACHINERIES
Machineries embraces machines, equipment,
mechanical contrivance, instruments, appliances or
apparatus which may or may not be attached,
permanently or temporarily, to the real property. It
includes the physical facilities for production, the
installations and appurtenant service facilities,
those which are mobile, self-powered or self-
propelled, and those not permanently attached to
the real property which are actually, directly, and
exclusively used to meet the needs of the
particular industry, business or activity and which
by their very nature and purpose are designed for,
or necessary to its manufacturing, mining, logging,
commercial, industrial or agricultural purposes. (
Sec.199(0), RA 7160)
 Machineries:
Machineries which are of general purpose use
including but not limited to office equipment,
typewriters, telephone equipment, breakable or easily
damage containers (glass or cartons),
microcomputers, facsimile machines, telex machines,
cash dispensers, furnitures and fixtures, freezers,
refrigerators, display cases or racks, fruit juice or
beverage automatic dispensing machines which ARE
NOT DIRECTLY and EXCLUSIVELY USED TO MEET
THE NEEDS of a particular industry, business or
activity SHALL NOT BE CONSIDERED WITHIN THE
DEFINITION OF MACHINERY under this rule.
(Art.190(0) of IRR of RA 7160)
Sec. 224. Appraisal & Assessment of Machineries

(a) The FAIR MARKET VALUE (FMV) of a brand new

machinery shall be the acquisition cost, in all other
cases, the fair market values shall be determined by
dividing the remaining economic life of the
machinery by its estimated economic life and
multiplies by the replacement or reproduction cost.
Remaining Economic Life Replacement or
Estimated Economic Life
x Reproduction Cost =FMV
(b) If the machinery is imported, the
acquisition cost includes freight,
insurance, bank and other charges,
brokerage, arrastre, and handling, and
installation charges at the present site.
The cost in foreign currency of imported
machinery shall be converted to peso cost
on the basis of foreign currency exchange
rates as fixed by the central bank.
a CERTIFIED LIST OF MACHINERY indicating the
acquisition cost, as supported by consular invoices, in
case of imported machinery; and plain invoices, in case
of locally manufactured machinery; date of acquisition,
date of actual commercial operation, including freight,
insurance, brokerage, bank and other charges, handling
and installation cost, etc. including the model, serial
number, quantity, pieces, horse power/capacity and
country of origin, if imported.

b Information from the Bureau of Customs, Securities and

Exchange Commission, Banks and other agencies for
reference in confirming the value of the machinery.

c Notice of the date of inspection, if the

owner/administrator is not around during the discovery.

d Report of inspection of the machinery.

e Accomplished affidavit of ownership or Sworn

Statement of the market value of the property, or
certificate required under Item (a) above.
 Appraisal of Machinery:
The APPRAISAL OF MACHINERY shall be based on
its ACTUAL COST which include the acquisition
cost, freight and insurance charges, brokerage,
arrastre and handling, customs duties and taxes,
transportation, handling and installation charges,
among others, to the site.

To support the actual cost, the declared value or

sworn statement from the owner or responsible
officer in case of a corporation, shall be secured
to form an integral part of the appraisal report.
 For IMPORTED BRAND NEW MACHINERY, the market value
should be based on its acquisition cost; which cost shall be that
which is the actual cost to the owner where the same is not yet
depreciated as appraised within the year of its purchase, plus
the cost of freight, insurance, bank and other charges,
brokerage, arrastre and handling, duties and taxes, plus cost of
inland transportation, handling and installation charges at the
present site.

In all other cases the cost of foreign currency of imported

machinery shall be converted to peso equivalent based on
exchange rates fixed by the BSP at the time of acquisition and
applied a depreciation allowance of not exceeding 5% per year.
 FMV = AC X FERAC
Where FMV - Fair Market Value
of Machinery

AC - Acquisition Cost
FERAC - Foreign Exchange
Rate at the time
of Acquisition
 In case of doubts as to the declared value of machinery as
indicated in the sworn declaration of the owner confirmation
maybe made by securing documents from the Bureau of
Customs (BOC), Bureau of Internal Revenue (BIR), Securities
and Exchange Commission (SEC) and other agencies of the
government.
Illustration:
Assume that in 2003, several pieces of machinery worth US
200,000.00 were installed in a factory building. Freight and
insurance charges were US 20,000.00. Peso expenses for
brokerage, arrastre and handling, customs duties, etc.
amounting to Php 2,000,000.00

US 200,000.00 x Php 54.20/US$ Php 10,840,000.00

US 20,000.00 x Php 54.20/US$ 1,084,000.00
Php 2,000,000.00 2,000,000.00
Market Value Php 13,924,000.00
Assessment Level 80%
Assessed Value Php 11,139,200.00
f REAPPRAISAL OF MACHINERY by RCNLD shall be based on
the formula established for the purpose:

FC2 REL
RCNLD = OC X X
FC1 EL

Where:
RCNLD = Reproduction/Replacement Cost New Less Depreciation
OC = Original Cost or Acquisition Cost
FC1 = Foreign Currency Exchange Rate at Time of Acquisition
FC2 = Foreign Currency Exchange Rate during Reassessment
EL = Economic Life
REL = Remaining Economic Life
Assume that a machinery from U.S.A. was acquired, installed and in
operation in February 2009 at a total original converted cost of Php
10,000,000.00 reappraisal was made in November 2013 to take effect in
2014
Dollar Exchange Rate at the Time of Operation = P 25.0282 to 1.00 dollar
Dollar Exchange Rate at the Time of Appraisal = P 40.6232 to 1.00 dollar
Estimate Economic Life = 30 years

P 40.6232 26 years
RCNLD = Php 10,000,000.00 X P 25,0282 X 30 years

= Php 10,000,000.00 X 1.62 X 0.87

= Php 14,094,000.00
A.L. = 80%
Assessed
= Php 11,275,200.00
Value
 An annual rate of depreciation shall be applied to the
machinery, provided that the formula (1/economic Life)
shall be used; and provided further, the major
expenses to recondition the same extending its life
span shall be capitalized and added to the
depreciation.

Depreciation Allowance for Machinery - The

depreciation allowance shall be made at a rate not
exceeding five percent (5%) of its original cost or its
replacement or reproduction cost, as the case maybe,
for each year of use: Provided, however, that the
remaining value of all kinds of machinery shall be
fixed at not less than twenty percent (20%) of such
original, replacement, or reproduction cost for so long
as the machinery is useful and in operation. ( Sec
225,LGC)
 Categories of PME:
Plant - Assets that are inextricably combined with others
and that may include specialized buildings, machinery
and equipment.

Machinery Individual machines or a collection of

machines. A machine is an apparatus used for a
specific process in connection with the operation of the
entity.

Equipment - Other assets that are used to assist the

operation of the enterprise or entity.
Source: PVC,1st Edition, DOF,BLGF
 Types of Valuation Employed:
Income whereby the present worth of the future
benefits (or income) derive from an asset is
estimated and capitalized at an appropriate
(market-derived) interest rate to arrive at its value.

Reproduction Cost (New) - The cost to create a

virtual replica of the existing structure, employing
the same design and similar building materials.
The current cost of an identical new item.
 Types of Valuation Employed

Replacement Cost (New) - A replacement cost estimate

envisions constructing a structure of comparable
utility, employing the design and materials that are
currently used in the market. The current cost of a
similar new item having the nearest equivalent
utility as the item being appraised.

Fair Value - The amount for which an asset could

be exchanged between knowledgeable, willing
parties in an arms-length transaction.
 Type of Valuation Employed:

Liquidation Value - The value of assets estimated with

regard to specific circumstances under which the assets are
sold. Liquidation value describes a situation where a group
of assets employed together in a business are offered for
sale separately, usually following a closure of the business.

Forced Sale - A circumstance where a seller is under

compulsion to sell and/or a proper marketing period is not
available.
 Type of Valuation Employed :
Salvage Value - describes the value of an asset
that has reached the end of its economic life for
the purpose it was made. The asset may still have
value for an alternative use or for recycling.

Scrap Value - The remaining value of an asset at

the end of a prescribed period of time. Also
known as residual value.
 Depreciation:
Depreciation - In the context of asset
valuation, depreciation refers to the
adjustments made to the costs of
reproducing or replacing the asset to reflect
physical deterioration and functional
(technical) and economic (external)
obsolescence in order to estimate the value
of the asset in a hypothetical exchange in
the market when there is no direct sales
evidence available
 Type of Obsolescence:
Physical Deterioration Loss in value
resulting from wear and tear of an asset and
exposure to various elements. It could be
curable or incurable.

Depreciation is curable if it can be economically cured

such as replacement of major components or rebuilding
costs.
Depreciation is deemed incurable as the expense to cure
the problem is impractical.
 Type of Obsolescence:
Functional Obsolescence - A loss in value within
a structure due to changes in tastes, preferences,
technical innovations, or market standards.

Economic Obsolescence - A loss in value due to

factors outside the subject asset. Also known as
external obsolescence. Examples of external
obsolescence are changes in competition or in
surrounding land uses like an industrial plant near
a residential area. It is deemed incurable as the
expense to cure the problem is impractical.
 Valuation Reporting:
Definition of the Problem
The purpose of appraisal
The date of appraisal
Identification of property to be appraised.
Field Investigation in this step a physical inventory and
inspection of the property, the purpose of which are:
Technical specification and complete identification of
the various element of cost;
Quantities of various items of property;
Age and condition of each item; amd
Facilitate reconciliation with the company records.
 Data Collecton/Inventory:
In taking inventory, the objective is to describe the
property enough to price and identify like:

Type its generic name like tank, pump, boiler,

elevator, electric generator, etc.
Manufacturer and serial number
Catalogue of specifications
Size, capacity, and make
Materials of construction
 Data Collection / Inventory:
Auxiliary equipment
Prime mover i.e., electric motor, engines, etc.
Controls electrical, pneumatic, hydraulic
Starting equipment, transformers, heavy duty
wiring
Connection wiring and pipings
Millwright works platform, foundation,
safety devices, etc.
 Data Collection / Inventory:

At this stage, appraiser examines logbooks

and other maintenance records, property
ledger and other relevant data and
interviews operators and maintenance
personnel to gather information which could
help in estimating depreciation.
 Estimate of Value

Sources of value

Clients records
Manufacturer and supplier
Catalogs sale offering in the newspaper
listings, magazines
Internet
s
 Development of Value
In developing market value, consideration must be given to
factors such as:

Price of manufactured equipment

If imported, prevailing foreign exchange rate and the
effect of realignment of world currency, if any, and all
expenditures in the importation, such as:
land or ocean freight
insurance
bank charges and commission
Development of Value (cont.)
duties and taxes
brokerage wharfage and arrastre
other landing charges
Cost of handling and transportation to the
site
Installation cost
 Short Form Method
The unit-in-place (quantity survey) method unit
cost for various component are developed using a
workable unit such as square foot, square meter,
linear foot or appropriate working unit.

Index of trending method by applying trend factor

to the acquisition cost.

 Short form method (cont.)

Cost ratio factor a quick estimate by
applying cost factor to the purchased price to
get the installed cost.
Installed Cost purchase price x cost ratio factor
(use of this factor should be restricted to the process
plant units equipment for which the data are
developed.)
Price per pound of weight only used as the
last resort.
 Illustration No. 1:
Valuation of Cummins-Onan- 1,500 Kw
Generator Set:
Acquisition Cost In 1998=$170,000 (CIF-Mla)
To compute in Peso:
= $170,000 x 38.750 x = Php 6,587,500. say 6,588,000.

To compute to present value:

RCN = AC x ( FC2/FC1) x (REL/RE) x PI
RCN = Php 6,588,000. x (55.988/38.750) x 0.50
= Php 4,759,830. = Php 4,760,000.00
 Illustration No. 2
Assume that in 2003, several pieces of
machinery worth USD 200,000.00 were
installed in a factory building. Feight and
insurance charges were USD 20,000.00.
Peso expense s for brokerage, arrastre and
handling, custom duties, etc, amounted to
Php 2,000,000.00. Appraise the machinery
at Philippine peso currrency.
 Solution to Illustration No. 2
Appraisal could be:
USD 200,000.00 @ 54.20033 = 10,840,600.
USD 20,000.00 @ 54.20033 = 1,084,060.
Brokeage,arastre,etc. = 2,000,000.
Market Value (2003) = 13,924,726.
 Problem Solving:
Determine the market value of Water Pump with the following
specifications: Model GPX-100, capacity-200 liters per minute, 10 hp
electric motor direct drive, with electrical controls, piping connections,
mounted of common steel base and concrete foundation. Weight of Pump
and Motor 250 kg.
Condition after inspection
Physical depreciation 40%
Used life 3 years
Economic life 20 years
Functional obsolescence 20%
Economic obsolescence 0%
Plant location: Pasig, M.M.
Available Price information:
2010 October - $3,500 FOB factory
2013 May Php65,000 C.I.F. Manila
Dollar Adjustment Rate 1.203 (2010-2013)
2013 Dollar Exchange Rate = P48.11 per US Dollar

Solution:
From dollar adjustment rate 1.203 (1997 to present)
Industry Canning/Food

Reproduction Cost New = $3,500 x 1.203 = $4,210.5

FOB Factory
Add: Packing, Labor & Inland Freight 3% = $126.32
FOB Port of Origin $4,336.82
Plus: Ocean Freight 20% US $ 867.36
Insurance 2% - $86.74
CIF Manila = $5,290.92
Exchange rate P48.11/US$
CIF Manila = P254,546.20
 APPENDIX A
FOREIGN EXCHANGE GUIDING RATES FOR THE VALUATION OF
IMPORTED MACHINERIES
(PESO PER U.S. DOLLAR RATES)
YEAR PESO YEAR PESO YEAR PESO
1945 2.0000 1965 3.9010 1985 18.6073
1946 2.0000 1966 3.8955 1986 20.3857
1947 2.0000 1967 3.9152 1987 20.5677
1948 2.0000 1968 3.9159 1988 21.0947
1949 2.0000 1969 3.9192 1989 21.7367
1950 2.0000 1970 6.0246 1990 24.3105
1951 2.0000 1971 6.4317 1991 27.4786
1952 2.0000 1972 6.6748 1992 25.5125
1953 2.0000 1973 6.7563 1993 27.1198
1954 2.0000 1974 6.7879 1994 26.4172
1955 2.0000 1975 7.2479 1995 25.7144
1956 2.0000 1976 7.4402 1996 26.2157
1957 2.0000 1977 7.4028 1997 29.4707
1958 2.0000 1978 7.3658 1998 40.8931
1959 2.0000 1979 7.3776 1999 39.0890
1960 2.7333 1980 7.5114 2000 44.1938
1961 3.0000 1981 7.8997 2001 50.9927
1962 3.8082 1982 8.5400 2002 51.6036
1963 3.8998 1983 11.1127 2003 54.2033
1964 3.8999 1984 16.6987 2004 56.0399
2005 55.0437
 Thank you very much for this
opportunity in sharing with you
my little knowledge and
experiences.

Always at you service. . .

MON ALBEUS