Premise of value in CIRP: imported CNC line, failed spindle and forced-sale indications
A Tier-2 auto-component manufacturer is in corporate insolvency resolution. Its machining shop has six imported five-axis CNC machining centres, installed in 2017 at a landed cost of ₹3.10 crore each, including customs duty, freight, and installation. The current replacement cost new, on the same landed basis, is ₹4.05 crore per machine. The machines are eight years old; the valuer adopts a 15-year technical life and straight-line physical deterioration. Maintenance records are good, but one machine has a failed spindle; the OEM quotes ₹38 lakh to repair it. Plant utilisation is 32%, the order book is nil, and the resolution applicant is evaluating whether to continue the business. Dealer indications for similar used machines are ₹1.05 crore each in running condition and ₹0.45 crore as-is for the failed-spindle unit; selling costs are 8%. Land and building are valued separately. The resolution professional asks for both going-concern and liquidation indications.
1. Compute the replacement cost new less depreciation (RCNLD) of the six-machine block on a going-concern basis, showing the treatment of the failed spindle.
Read the worked answer
Step 1 - Replacement cost new (RCN).
RCN per machine = ₹4.05 crore.
RCN for six machines = 6 × ₹4.05 crore = ₹24.30 crore.
Step 2 - Physical deterioration.
Age-life ratio = 8 years ÷ 15 years = 53.33%.
Depreciation = 53.33% of RCN.
RCNLD per machine before cure = ₹4.05 crore × (1 − 0.5333) = ₹1.89 crore.
Step 3 - Failed spindle.
The repair cost is a current cost to restore equivalent utility. It should be deducted after depreciation, not depreciated itself:
RCNLD of failed unit = ₹1.89 crore − ₹0.38 crore = ₹1.51 crore.
Step 4 - Block value.
Five running machines = 5 × ₹1.89 crore = ₹9.45 crore.
Add failed-spindle machine = ₹1.51 crore.
Going-concern RCNLD indication = ₹10.96 crore.
Caveat. This is a physical-deterioration figure only. The 32% utilisation and nil order book point to economic obsolescence, which must be assessed separately before concluding a going-concern value. If the repair does not restore equivalent utility, the failed unit should be valued on an as-is basis instead.
2. Compute the liquidation value of the block from the dealer indications and explain why it is not an arbitrary discount from RCNLD.
Read the worked answer
Liquidation computation.
Five running machines: 5 × ₹1.05 crore = ₹5.25 crore.
Failed-spindle unit, as-is: ₹0.45 crore.
Gross realisable before selling costs = ₹5.70 crore.
Less selling costs at 8% = ₹0.456 crore.
Liquidation indication = ₹5.244 crore, say ₹5.24 crore.
Why this is not a flat haircut on RCNLD.
The RCNLD of ₹10.96 crore assumes continued use, a repair programme, and a buyer who needs the capacity. The liquidation figure reflects a different market: a short sale timeline, as-is where-is condition, limited buyer pool for five-axis machines, dismantling and removal risk, and dealer margin. The 8% selling cost is only one explicit adjustment; the dealer quotes already embed the forced-sale and condition effects. The gap of about ₹5.72 crore, or 52% of RCNLD, is therefore evidence of economic obsolescence and market conditions, not a mechanical discount.
Caveat. If the dealer indications are asking prices rather than concluded transactions, the valuer should apply a further negotiation adjustment and disclose that the liquidation value is an estimate of realisable value within a defined sale period, commonly 120–180 days.
3. Which premise and method should the valuer adopt for the CIRP information memorandum, and what caveats must be disclosed?
Read the worked answer
Going-concern value. Use the cost approach with RCNLD, then deduct functional and economic obsolescence. The failed spindle is a cure cost; low utilisation and nil order book are economic obsolescence. The valuer should test whether a hypothetical buyer would pay for all six machines or only the capacity needed. If only four or five machines are needed, the surplus units should be valued separately at their highest-and-best alternative, not at full RCNLD.
Liquidation value. Use the market approach with forced-sale adjustments, as computed from dealer indications. Do not use RCNLD as the liquidation value. The liquidation value should state the assumed sale period, selling costs, and as-is condition.
Caveats to disclose.
- Reliance on management’s age, cost, and maintenance records, subject to physical verification.
- The repair estimate is an OEM quotation, not a completed repair.
- Dealer indications may be asking prices and may not be transaction evidence.
- Land and building are excluded and valued separately.
- Environmental, title, and employee liabilities are not included unless specifically instructed.
- The two premises must not be mixed: a going-concern figure is not a floor for liquidation, and a liquidation figure is not a discount to going-concern value.