Models for Estimating Depreciation in Plants, Machinery, and Equipment: Analysis and Proposals

Journal of Property Tax Assessment & Administration, Vol. 9, Issue 3, 2012

40 Pages Posted: 30 Jan 2014

See all articles by S. Smolyak

S. Smolyak

Russian Academy of Sciences (RAS) - Central Economics and Mathematics Institute; The State University of Management

Date Written: July 11, 2012

Abstract

This article presents a novel application of the discounted cash flow (DCF) method for assessing percent good factors for secondhand items of machinery and equipment. The process is grounded in the principle of highest and best use and accounts for such factors as the salvage value of equipment and associated property as well as income taxes without requiring cash flow forecasts of the income obtainable from using the equipment.

Application of the suggested DCF method to machinery and equipment valuation offers solutions to the following issues, which are elaborated in the article:

1. Formalizing general patterns of change in the value of aging equipment;

2. Recognizing inconsistencies in tabular and analytical methods for determining percent good factors for property tax assessment;

3. Developing new analytical models which consistently describe the dependency of percent good factors on the age of equipment and are practical for the development of property tax assessment depreciation schedules;

4. Determining percent good factors for equipment aged beyond its useful economic life.

The most pertinent results may be achieved from this proposed method when the equipment depreciation process is treated in a continuous time formulation.

Keywords: equipment, valuation, depreciation, percent good factor

JEL Classification: D46, C81

Suggested Citation

Smolyak, Sergey, Models for Estimating Depreciation in Plants, Machinery, and Equipment: Analysis and Proposals (July 11, 2012). Journal of Property Tax Assessment & Administration, Vol. 9, Issue 3, 2012, Available at SSRN: https://ssrn.com/abstract=2386697

Sergey Smolyak (Contact Author)

Russian Academy of Sciences (RAS) - Central Economics and Mathematics Institute ( email )

47, Nakhimovsky prospect
Moscow, 117418
Russia

The State University of Management ( email )

99, Ruzyanski Prospect
Moscow, 123060
Russia

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