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

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