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Engineering Valuation - Concept of Value and Costing in Engineering Valuation

This document discusses concepts of value and costing in engineering valuation. It defines value as the monetary worth of an asset and valuation as placing a monetary value on an asset. There are different types of valuation including ordinary, formal, and engineering valuation, which involves valuing infrastructure using technical computations. Methods of establishing asset value are discussed, including considering the asset's accounting lifetime, real lifetime, economic lifetime, and discount rate. Steps in valuing engineering infrastructure include examining components, determining efficiency, checking design periods, and determining individual component depreciation. The valuation expression estimates net present value of initial costs minus rehabilitation, additional components, and depreciation costs. Real worth is the amount needed to return the initial cost plus interest by the

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David Akomolafe
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90 views

Engineering Valuation - Concept of Value and Costing in Engineering Valuation

This document discusses concepts of value and costing in engineering valuation. It defines value as the monetary worth of an asset and valuation as placing a monetary value on an asset. There are different types of valuation including ordinary, formal, and engineering valuation, which involves valuing infrastructure using technical computations. Methods of establishing asset value are discussed, including considering the asset's accounting lifetime, real lifetime, economic lifetime, and discount rate. Steps in valuing engineering infrastructure include examining components, determining efficiency, checking design periods, and determining individual component depreciation. The valuation expression estimates net present value of initial costs minus rehabilitation, additional components, and depreciation costs. Real worth is the amount needed to return the initial cost plus interest by the

Uploaded by

David Akomolafe
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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THE CONCEPT OF VALUE

AND COSTING IN
ENGINEERING VALUATION

Dr. D. A. Isadare
INTRODUCTION

 Value: Is the monetary worth of an asset at a particular point in time.


An asset is something that is useful and has value.
It could be a property, physical structure like house, equipment, car, etc.
 Valuation: Is the act of placing monetary worth on an article (physical object) at a
particular point in time.
The words Valuation and Appraisal are often used interchangeably because they are
synonymous.
The value of a property must be expressed in the monetary unit of currency of the
country in which the property/article is situated.

Please note that Engineering Valuation deals with valuation of engineering


infrastructures
TYPES OF VALUATION
i. Ordinary Valuation: This is used in the ordinary exchange of
property, the value of which is determined by the discretion of the
seller and buyer. It does not involve the appointment of qualified
appraiser/valuator.

ii. Formal Valuation: Here, the value of the property is determined by


qualified valuators. Such appraisers are required to be licensed for
revenue purposes. Formal Valuation may be used for property sales,
taxation purpose, securing loans, determine rents, etc. The value may
TYPES OF VALUATION

CONT’D
Engineering Valuation: This involves estimating the value of specific properties
with professional engineering knowledge. The properties covered here are mines,
factories, buildings, machinery, industrial plant, engineering construction of all
kinds and public utilities.
Engineering Valuation involves the use of relevant technical computations, as we
are going to see in subsequent slides.
The need for open Mind: The end point or result of engineering valuation is
value. The value stated by one valuator may not agree with that stated by other.
In looking at this, the methods employed and the weights accorded the factors
EVOLUTION OF VALUATION
 The development of Engineering valuation dates back to 1890
 Hitherto, valuation was considered as exclusive of Merchants, Accountants
and Financiers.
 Organized Engineering Valuation Literature was not readily available until
1900
 Since then, the art of engineering valuation has been undergoing
improvements on continuous basis. Engineers, Accountants, Economists and
Lawyers now work together as a team on various stages of valuation.

VALUING INVESTMENTS
 To value an investment or Property, a classical formula that links an
asset’s depreciation expense to its net value is used according to the
expression:

At = [(I + a) x (Kt1 – Kt)] 1

Where Kt is the net value of the asset at time t,

a is the rate of return on capital

At is the depreciation expense, i.e. the normal remuneration for the use
METHODS OF
ESTABLISH ASSET
VALUE
METHODS OF ESTABLISH ASSET VALUE CONT’D
KEY DEFINITIONS
 Accounting lifetime: For a given asset category, accounting lifetime is
the time chosen by the company to depreciate this asset category in its
accounts.
 Real lifetime: This is the time, whether observed or expected, during
which the asset is actually used, i.e. the useful period of an asset.
 Economic lifetime: This is the optimum renewal period for an asset. I.e.
how long the asset generates more income when compared to its
operating costs. It is otherwise known as service life or useful life or
depreciable life
 Technical Progress Rate: This measures the rate of growth of
productivity of an asset/equipment.
 Discount Rate: This is the rate of return used to calculate the present
INDUSTRIAL
INFRASTRUCTURE
 Industrial Infrastructure refers to tangible things required for smooth
running of an industry as well as others that will hasten the process of
industrialization.
 These includes manpower in terms of skill, electricity, natural gas, portable
water, industrial water, sewage and industrial wastewater, industrial waste
disposal system, raw materials, products and by-products,
telecommunication and transportation network.
 All these factors affect the value of finished product and therefore have to
VALUATION OF ENGINEERING INFRASTRUCTURE

 Valuation again is the act of placing value or worth on an article. The


value or worth could be tangible or intangible.
 Tangible worth are those that can be quantified in monetary terms
whereas intangible worth cannot be quantified in monetary terms but in
the usefulness.
 Valuation is carried out for the following reasons:
i. To decide the price to charge users
ii. To decide the cost of share, if the part of the service is to be sold out
iii. To decide on the maintenance cost and scheduling
iv. To estimate expansion or extension cost
STEPS INVOLVED IN VALUATION OF
ENGINEERING INFRASTRUCTURE
i. Examine or run the service

ii. Determine the efficiency or effectiveness of each component of the


service and what is needed to bring each up
iii. Check the estimated design period and projected users population

iv. Check the age of the service at the time of valuation and current user
population

v. Determine the life span of each component of the system


vi. Check the initial cost of the project
VALUATION
EXPRESSION
 The valuation is estimated as follows:
A = Net Present Value of Initial Cost – (Cost of Rehabilitation
of Inefficient Components + Cost of Additional Components
to meet Target Design Population + Depreciation of Efficient
System)
NET PRESENT VALUE
COST OF REHABILITATION OF INEFFICIENT
COMPONENTS

 It is possible that at the time of valuation, some components

are not working as desired or their useful lives have expired

 Such components must be rehabilitated to perform effectively

 This must be factored into the valuation expression


COST OF ADDITIONAL
COMPONENTS
 Sometimes, the infrastructure does not provide the required

service to cover the target population on which the initial cost

was based

 In such a situation, additional expenses are required to make

the service meet the designed target population and this must
DEPRECIATION OF
EFFICIENT SYSTEM
 Each component of the system/service must be depreciated

separately and then the individual depreciations added to give

the total depreciation


DEPRECIATION OF EFFICIENT SYSTEM CONT’D
REAL WORTH OF AN
ASSET
 Real Worth: This is the amount that must be invested at the

beginning of the project to return the equivalent of a

component’s initial cost plus interest by the end of useful life

of the component.
REAL WORTH OF AN
ASSET CONT’D
A SECOND LOOK AT
VALUE
 Value can also be defined as a measure of the desirability of
ownership of property

Factors affecting the value of property are:


i. Time

ii. Place/location
iii. Purpose

iv. Parties involved, etc


Questions
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