CHAPTER ONE. all devices in fixed or movable form, other than real estate, deployed in manufacturing,

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1 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 with other items to enhance the productivity or operating facility; and includes 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 1999). Valuation of Plant and Machinery is an important and very 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 machinery collectively constitute a general 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 the majority of production functions previously performed by men, it becomes 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 1

2 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 & machinery may be required will include insurance, 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 depreciated replacement cost (DRC) for short. This is not just a mere coincidence 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 2

3 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 depreciation and obsolescence factors within the context of plant, machinery and equipment valuation among practicing Estate Surveyors and Valuers in Lagos metropolis. 1.2 Statement of the research problem 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 challenging aspect of the valuation profession, especially when there are no market comparables for the subject asset. Consequently, the valuer results into using the cost approach which is often subject to the valuer s understanding of depreciation and obsolescence in arriving at a reliable market value. The identification and quantification of physical, functional and economic obsolescence is an important procedure in any cost approach valuation analysis. Nonetheless, some plant and machinery valuers refuse to 3

4 recognize economic obsolescence and functional obsolescence as a generally accepted cost approach allowance. Some valuers assert that a cost less physical deterioration calculation encompasses all forms of obsolescence. This controversy on the classification and 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 different valuers perceive depreciation and obsolescence, its determination and 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 do valuers see other forms of obsolescence as different from physical deterioration? What is the distinction between depreciation and other obsolescence factors in plant and machinery valuation? What is the difference between technological obsolescence and functional obsolescence in plant and machinery valuation? 4

5 1.40 Aim and objectives of the research 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 Objectives to the aim of the research 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 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 appraiser s intuition and subjective judgment in accordance with some laid down 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 questioning regarding value opinion given by professional estate surveyors and valuers especially when their computation has to do with depreciation and obsolescence in the depreciated cost approach (DRC).It is shocking to know that even among practising surveyors 5

6 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 creating a common ground for accounting for obsolescence among academicians 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 metropolis. The study will deal basically with evaluating the valuers perception of depreciation and obsolescence as it concerns plant and machinery valuation. Valuers 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 6

7 will be collected directly from firms of registered estate surveyors and valuers within the aforementioned area. 1.8 Limitation of encountered 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: A lot of time was involved in the process of gathering data, and lectures were skipped on several occasions. Administration problems: Some of the respondents were either indisposed or very 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 entity including specialized non permanent building: machinery (individual 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 7

8 deterioration, functional obsolescence and economic obsolescence in order 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: This refers to the impairment of desirability of useful life arising from factors external to the property, such as economic forces 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: 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 technology has developed. Symptoms suggesting the presence of functional obsolescence are excess operating cost, excess construction, (excess capital cost) over capacity, inadequacy, lack 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 8

9 Physical 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. 9

10 CHAPTER TWO LITERATURE REVIEW 2.0 Introduction According to IVSC (2004), Plant and equipment combine to constitute a wide variety of situations requiring skillful assessment of the utility of the property valued and careful 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 ownership. Hence the characteristics of these categories of property should be put into 10

11 consideration when valuing plant and machinery. Many plant and machinery valuers find it very challenging as it may require the application of several knowledge, ranging from 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 or with income potential. Ifediora (2004) pointed out that plant and machinery 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 of plant and machinery should however be ready to face the brain tasking and multifaceted discipline of this aspect of valuation. Otegbulu (2006) acknowledge 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 analytical and quick to capture the critical issues in his valuation undertaking. 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. 11

12 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 practice. Hence exclusive exposure and implied familiarity to Valuation of Plant & 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 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 Overview of plant and machinery valuation 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 equipment, in addition to other forms of fixed asset like land, building and installed plant and machinery. However Budhbhatti, (1999) summarized plant and machinery of an enterprise to include all devices in fixed or moveable form other than real estate, deployed in manufacturing, 12

13 processing or assembly of products from the stage of raw materials to finished goods. 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 Valuation Standards in 2004 Committee summarized the characteristics of plant and machinery as tangible assets that: (a) Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. (b) Are expected to be used during more than one period. 2.2 Types of plant, machinery and equipment valuation 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

14 (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. (Otegbulu,2006) and Kuye (2009) said that the value of plant and machinery will 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 14

15 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 Concepts of value in plant and machinery valuation 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 specific date and assuming that the Continued Use business earnings support the value 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 amount includes all normal direct and indirect costs, such as installation and other 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

16 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 highest price 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 acting prudently, knowledgeably and assuming the price is not affected by undue 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 component of the whole property that is retired from 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 Purposes of plant and machinery valuation 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: 16

17 (a) Valuation based on 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: There are situation where machine / plant is working satisfactorily 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 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) Depreciation 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 17

18 2.5 Methods of valuation Virtually all plants and machinery valuation uses the three basic traditional methods 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) (b) (c) The cost approach (DRC) The market comparison approach The income 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 economic theory of substitution. Like the other valuation approaches listed above, it involves comparing the asset being valued with another. However, DRC is normally used in situations where there is no directly comparable alternative. The comparison therefore 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 acquiring an equivalent new one. The technique involves assessing all the costs of providing a modern equivalent asset using pricing at the date of valuation (RICS, 2007).This view is supported by Kwong and Montes Jr (2003) in their view on cost approach as the cost to reproduce or replace in new condition the assets appraised in accordance with current market prices for similar assets, with allowance for accrued depreciation arising from condition, utility, age, wear and tear, or obsolescence present, taking into consideration past and present maintenance policy and rebuilding history. 18

19 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 adjusted for losses in value due to physical depreciation, functional obsolescence, 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 of allowance for depreciation. Sayce and Connellan as cited in Kuye (2009) also support this opinion by stating that determination of the appropriate rate of depreciation is important in the application of the DRC method. Income approach Income approach is based on the present value of cash flow that an asset can be expected to generate during its remaining life. This approach is based on a 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, (2009) is of the opinion that the most widely used and accepted approach is the market approach. This approach considers prices recently paid (or currently asked) for similar items with adjustments made to indicated market prices to reflect certain conditions of the comparables in contrast to the subject items. This approach is appropriately 19

20 employed when valuing assets which are commonly bought and sold in arm's length 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 Identification of plant and machinery 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 however classified the identification of plant and machinery into the following two categories: (a) (b) Micro-identification Macro-identification Micro-Identification 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

21 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 to any special foundations, servicing connections like wiring controls, 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 DEPRECIATION DRC REMARK PURCHASE 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

22 How the plant is manufactures What the capacity of the plant is Source: Alico, 1986 A list of information to be considered when gathering data for macro identification 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 General condition of plant and components 2.7 Concept of depreciation and obsolescence Otegbulu (2008) describes depreciation has a loss not restored by current maintenance due to all factors causing ultimate retirement of an asset, such as wear and tear, decay, inadequacy, and 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

23 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 Agency SAMA (2006) agrees with this view by saying that depreciation is a loss in utility and hence value from any cause. Similarly, accrued depreciation is defined 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. The concept of depreciation without doubt is cardinal in the use of the depreciated 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 in demand, in design or in the art, and other technical or legal 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

24 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 depreciation are physical deterioration, functional obsolescence and economic obsolescence. He equally identified that there are three broad approaches to the estimation of depreciation. These three approaches are Direct method 24

25 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 deterioration 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

26 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 inappropriate to determine the effect of physical deterioration on value depreciation only in purely mechanistic terms. Functional obsolescence 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 accessories, or any other allied factors. IVSC, (2004) is of the take that functional obsolescence arises where the design or specification of the asset no longer fulfils the function for which it was originally designed. It added that in some cases functional 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

27 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 obsolescence 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

28 Decreasing demand etc SBE (2009) supports this view and defines economic obsolescence, also known as external obsolescence, as a loss in value resulting from adverse 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 overall market conditions for a property. For example, if the output of a machine is superseded in the marketplace by output of a different material (for examples, fibreglass for 28

29 metal or plastic for wood) and the market no longer absorbs the 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

30 CHAPTER THREE RESEARCH METHOD 3.0 Introduction: The purpose of this chapter is to examine various statistical approaches that have been explored in previous studies with a view to formulating an appropriate methodological 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 problem, description of tools required for investigation, including questionnaire 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 work basically involves the study of valuers perception and understanding of depreciation and obsolescence in relation to plant and machinery valuation. 3.2 Sample Frame: 30

31 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 of this sample frame is the financial costs involved in achieving considerable coverage. Consequently, a decision is made to restrict the respondents to a manageable 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 valuers) and collected them at the appointed time. However, this method among others ensures wider coverage, high response rate and reasonable level of accuracy (since adequate 31

32 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 Counter check questions: to find out if the respondents are giving the correct 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.) Firms/ surveyors details: this inquires about the respondent s background, and description of service rendered and the frequency of their engagement. (b.) (c.) Surveyors approach to valuation and problems encountered: this section critically examines the various methods which valuers adopt when carrying out plant and machinery valuation. It also endeavors to find out which of the methods are the most adopted and also explores the reasons for using such methods. It went further to hammer on how valuers perceive depreciation and obsolescence and to what degree are they accounted for in plant and machinery valuation. Depreciation and Obsolescence plant and machinery valuation: this section inquires of the respondent s knowledge of the concept of depreciation and obsolescence 32

33 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 The interview is semi-structured owing to the fact that, there are specific topics related 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 with respondent surveyors of selected firms and some specific question which the questionnaire does not covered will be asked in other to further ascertain 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 carrying out analysis. Each of the study objectives will be adequately reflected 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 approaches 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

34 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.). The variables for this study were measured mostly through rating and ranking 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 such, this study s questionnaire was structured to reflect the study s objectives, consequent upon which the supervisor carried out comprehensive review (construct validity). The questionnaire was then exposed through pilot study conducted within the study area to test for reliability. The pilot study involved 10 respondents, equally cutting across the study population area. 34

35 3.8.1 Sources of Data Collection The data gathered in the conduct of this research is the primary and secondary data. Primary Data: This was gathered mainly through questionnaire administration, personal observations and interviews. This research work is an action research 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

36 CHAPTER FOUR 4.0 Presentation and analysis of data This chapter focuses on the analysis and discussion of findings that were obtained from the data generated through the structured questionnaire and semi structured interview guide 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 use by way of examining for errors (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 Duration Qualification DESCRIPTION Duration of professional practice Average academic qualification of surveyors Professional affiliation Training Professional body firm belongs to Rate of attendance of CPDs, Seminars, Workshops etc. Plant and machinery valuation Rate at which plant and machinery valuation are carried out Depreciation and obsolescence Perception and understanding of 36

37 depreciation and obsolescence in plant and machinery valuation Methods Techniques used in carrying out plant and machinery valuation Technical assistance Information gathered from other professional Source: Field survey Presentation and analysis of descriptive data Data that are described in this work are presented as follows: The respondents are 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 above Total

38 Source: Field survey 2010 From the analysis above, it shows that the surveyors practicing for up to years have the lowest percentage(3.8%) of the sample surveyed, followed by those practising for above 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 years form the highest percentage of respondent. It can then be inferred that there responses will be borne out of experience. Table 4.2 Average academic qualification of surveyors Academic qualification Frequency Percent Cumulative Percent OND HND/BSc MSc./MBA B-TECH Total Source: Field survey 2010 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

39 No. Of staff Cumulative Frequency Percent Percent above Total Source; Field survey 2010 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 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 came 5 th on this scale with 7.5% and firms with staff strength of 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 especially when the targets set by firms are far beyond what the man-power can accommodate. Table 4.4 no. Of surveyors elected as NIESV member in firms No. Of surveyors elected as NIESV Cumulative member Frequency Percent Percent and above none Total Source: Field survey

40 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%. Table 4.5 Professional bodies affiliated to by firms Professional bodies Frequency Percent Cumulative Percent NIESV RICS&NIESV NIESV&IVSC RICS,NIESV&CASLE NIESV&REDAN 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. Table 4.6 Frequency of participation in training programme by firms Participation Frequency Percent Cumulative Percent often very often not often rarely 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

41 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. Table 4.7 Firms area(s) of specialisation options Frequency Percent consultancy all agency&mangement agency&consultancy agency&valuation feasibility&viability studies&valuation agency,management,co nsultancy&valuation agency mangement,consultancy and development management,feasibility &viability studies&consultancy valuation,consultancy& development Cumulative Percent Total 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 development. 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

42 share of respondents with 5.7%. The firms that specialised on agency, management, 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. Table 4.8 Firms that carry out plant and machinery valuation response Frequency Percent Cumulative Percent Yes No Total Source: Field survey 2010 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 and obsolescence will be borne more out of practice than what has been taught in classrooms. 42

43 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

44 Table 4.9 Frequency of use of cost method in plant and machinery valuation options Frequency Percent Cumulative Percent frequently Rarely Not used 0 Total Source: Field survey 2010 From the above statistics 80.8% of the respondents use cost method of valuation frequently in P&M valuation and only 19.2% use it rarely. However there is none who doesn t use cost method of valuation. What can be inferred from this is that cost method is the most used by valuers when carrying plant and machinery valuation. 44

45 Table Frequency of use of the investment method in P&M valuation options Cumulative Frequency Percent Percent frequently rarely not used Total 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 4.92 Frequency of use of the direct comparison method 45

46 options Cumulative Frequency Percent Percent frequently rarely not used Total Source: Field survey 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. Table 4.93 Frequency of use of the profit test method 46

47 options Cumulative Frequency Percent Percent frequently rarely not used Total 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. Table 4.94 Frequency of use of indexation method 47

48 options Cumulative Frequency Percent Percent frequently rarely not used Total 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 4.95 Methods most suitable for plant and machinery valuation 48

49 options Cumulative Frequency Percent Percent cost method direct comparison scrap/salvage value analysis income approach Profit method Total Source: Field survey 2010 From the above data, the cost method has 60.4%, the direct comparison method has a 30.2%, scrap/salvage value analysis has 5.7%, while income& profit method shares the same percentages of 1.9% each. Hence it can be inferred that the cost method is the most suitable for the valuation of plant and machinery. Table 4.96 Reason(s) for the suitability of use of methods 49

50 options Cumulative Frequency Percent Percent logicality transparency objectivity convenience logicality&objectivity transparency&convenie 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

51 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 4.97 Awareness on the concept of depreciation and obsolescence options Cumulative Frequency Percent Valid Percent Percent yes 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. Figure 4.2: The degree of importance of wear and tear in plant and machinery valuation 51

52 very important important The diagram above represents the importance attached to wear and tear by valuers in P&M valuation. About 80% of respondent valuers see the issue of wear and tear very 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 4.3 degree of importance of physical deterioration in P&M valuation 52

53 very important important The diagram above represents the importance attached to wear and tear by valuers in P&M valuation. About 60% of respondent valuers see the issue of physical 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

54 degree of importance of functional obsolscence in P&M valuation very important important i 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

55 degree of importance of economic obsolescence in P&M valuation very important important 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% only see it as important. The highest proportion of respondent don t see the consideration of economic obsolescence in P&M valuation as important. It can however be inferred that majority of valuers do not consider economic obsolescence as important in their valuation. Table Degree of importance of technological obsolescence in P&M valuation 55

56 options very Cumulative Frequency Percent Percent important important i don't know Total From the above statistics we can see that 15% of valuers see technological obsolescence as very important, 31% see it as important while 4% do not know whether it is important or not. It can however be inferred that the majority of surveyors admit the importance of technological obsolescence in P&M valuation. Table Perception of valuers on the importance of the determination of depreciation in P&M valuation 56

57 options very Cumulative Frequency Percent Percent important important not important Total From the above table it is obvious that 54.7% of the respondents perceive the determination of depreciation as very important, 34% see this as important while 11.3% see as not 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

58 From the figure above statistics 60.4% of respondent perceive that the assessment 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 percentage of 5.7% don t know the importance of the assessment of the level 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

59 Table Perception of valuer on the reliability of methods adopted in P&M valuation options very Cumulative Frequency Percent Percent important important not important Total 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 that it is not important. Hence it can be inferred that majority of valuers perceive the reliability of methods adopted as important. Table Degree of importance of valuer s judgments 59

60 options very Cumulative Frequency Percent Percent important important Total 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 Perception of valuers on the degree of importance of information given by the client in P&M valuation Cumulative very Frequency Percent Percent important important not important i don't know Total 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. It can thus be inferred that valuers perceive the information given by their client as important when carrying out P&M valuation. Table Respondents opinion on whether depreciation is a loss of value due to wear and tear only 60

61 options Cumulative Frequency Percent Percent strongly agree agree disagree strongly disagree Total 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 9.4% agree that it is while 34% strongly 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 Respondents opinion on whether obsolescence is simply a condition of physical deterioration options Cumulative Frequency Percent Percent strongly agree agree disagree strongly disagree undecided Total 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

62 that majority of valuers disagree that obsolescence is simply a condition of physical deterioration Respondents opinion on whether obsolescence is much more than physical deterioration Cumulative Frequency Percent Percent strongly agree agree disagree undecided Total 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 % further agree that it is more than physical deterioration and just 1.9% of respondents disagree while another 1.9% remains undecided. 62

63 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 % agree that they mean the same while 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

64 Respondents opinion on whether economic obsolescence is the same as external obsolescence options Cumulative Frequency Percent Percent strongly agree agree disagree undecided Total 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% disagree and undecided respectively. It can however be inferred that concept of economic obsolescence seem to be the least understood of all the concept of obsolescence. Figure 4.8 Respondents opinion on whether depreciation is a loss of value due to any cause 64

65 strongly agree agree disagree strongly 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 Respondents classification of loss of value due to change in technology 65