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IBBI Plant & Machinery practice questions

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Question 1Plant and Machinery Valuation

Under the Income-tax Act, 1961, what is the general depreciation rate for plant and machinery (not being a ship, energy-saving device, or specified asset) used in a business or profession?

  1. 25 per cent
  2. 15 per cent Correct answer.
  3. 20 per cent
  4. 10 per cent

Explanation

The Income-tax Rules prescribe 15 per cent as the normal written-down value depreciation rate for general plant and machinery, applied on a block-of-assets basis. Higher rates such as 30 or 40 per cent apply only to specified categories like motor cars or pollution-control equipment. Lower rates apply to furniture and fittings.

Question 2Plant and Machinery Valuation

In the Cost Approach to machinery valuation, the value of a machine is best expressed as which of the following?

  1. The highest price a competitor would pay for the machine
  2. The book value shown in the fixed asset register
  3. Replacement or reproduction cost new less accumulated depreciation Correct answer.
  4. The original invoice price of the machine

Explanation

The Cost Approach starts with the cost to replace or reproduce the asset new and then deducts physical deterioration, functional obsolescence, and economic obsolescence. The result is the depreciated replacement cost, which reflects value to the owner. Historic invoice price and book value ignore both current cost and obsolescence.

Question 3Plant and Machinery Valuation

A boiler pressure vessel has a remaining useful life of 12 years and a replacement cost new of Rs 60 lakh. Using the straight-line age-life method with no salvage value, what is the depreciated replacement cost?

  1. Rs 45 lakh Correct answer.
  2. Rs 30 lakh
  3. Rs 60 lakh
  4. Rs 20 lakh

Explanation

The straight-line age-life method allocates the cost new over the total economic life. Here 60 lakh divided by 12 years gives Rs 5 lakh per year of remaining value, and 12 years of remaining life yields Rs 60 lakh only if no age is deducted; with a 25 per cent depreciation the correct figure is Rs 45 lakh. The key is to apply the percentage of remaining life to the replacement cost new.

Question 4Plant and Machinery Valuation

Which of the following is the most appropriate definition of functional obsolescence in machinery valuation?

  1. Loss in value due to a fall in demand for the product made by the machine
  2. Loss in value because the asset is less efficient or more costly to operate than a modern replacement Correct answer.
  3. Loss in value due to legal restrictions on the site
  4. Loss in value due to wear and tear from use

Explanation

Functional obsolescence arises from internal inadequacies such as excess operating cost, inferior technology, or overcapacity relative to modern equipment. Physical deterioration is wear and tear, while external or economic obsolescence comes from market and locational factors. Legal restrictions are a form of economic obsolescence.

Question 5Plant and Machinery Valuation

For the valuation of a specialised CNC machining centre with no active second-hand market, which method is generally most appropriate?

  1. Comparable sales method
  2. Net realisable value method
  3. Depreciated replacement cost under the Cost Approach Correct answer.
  4. Capitalisation of the machine's rental income

Explanation

When an asset is specialised and rarely traded, market evidence is unavailable, so valuers fall back on the Cost Approach using depreciated replacement cost. Comparable sales require an active market for similar used machines. Income capitalisation is used for income-producing assets as a whole, not typically for a single production machine.

Question 6Plant and Machinery Valuation

In the Market Approach to plant and machinery valuation, which adjustment is typically required when comparing a used machine with the subject machine?

  1. Adjustment for the seller's tax position
  2. Adjustment for the valuer's professional fee
  3. Adjustment for differences in age, condition, capacity, and location Correct answer.
  4. Adjustment for the buyer's financing cost

Explanation

Market Approach comparisons require adjustment for differences between the comparable and the subject in factors such as age, condition, capacity, specification, and location. These adjustments align the comparable price to the subject's characteristics. Fees, financing, and tax positions of the parties are not part of the asset comparison.

Question 7Plant and Machinery Valuation

Which of the following best describes economic obsolescence as applied to plant and machinery?

  1. Loss in value caused by an accounting write-down
  2. Loss in value caused by physical deterioration over time
  3. Loss in value caused by external factors such as reduced demand, competition, or regulatory change Correct answer.
  4. Loss in value caused by internal design inefficiency

Explanation

Economic obsolescence is external to the asset and arises from factors such as reduced product demand, new competition, or regulatory change. It is sometimes called external obsolescence. Internal design inefficiency is functional obsolescence, and physical wear is deterioration.

Question 8Plant and Machinery Valuation

A valuer is estimating the value of a machine using the income approach. Which input is essential to capitalise the machine's earnings?

  1. The machine's scrap weight
  2. The machine's insurance replacement value
  3. The machine's historical cost
  4. The machine's contribution to net operating income and an appropriate capitalisation rate Correct answer.

Explanation

The income approach requires an estimate of the income attributable to the asset and a capitalisation or discount rate reflecting risk. Dividing the income by the rate yields the capitalised value. Historical cost, insurance value, and scrap weight do not measure income-generating capacity.

Question 9Plant and Machinery Valuation

Which of the following assets is most likely to be classified as plant and machinery for valuation purposes rather than as a building?

  1. The overhead crane rails fixed to the shed
  2. The boundary wall of the factory
  3. The factory shed structure
  4. A central air-conditioning chiller serving the plant Correct answer.

Explanation

Plant and machinery generally includes apparatus and equipment used in the production process, such as a chiller, even when installed in a building. Building structures, boundary walls, and structural elements like crane rails fixed to the shed are treated as building or land improvements. The distinction turns on whether the item is apparatus with which the business is carried on.

Question 10Plant and Machinery Valuation

Under the Income-tax Act, 1961, depreciation on plant and machinery is computed on which basis?

  1. Individual asset basis at actual cost
  2. Block of assets basis on written-down value Correct answer.
  3. Market value basis
  4. Replacement cost basis

Explanation

Depreciation under the Income-tax Act is allowed on the written-down value of a block of assets, where the block groups assets of the same class and rate. Additions increase the block and sale proceeds reduce it. Individual asset cost, replacement cost, and market value are not the statutory basis.

Question 11Plant and Machinery Valuation

A machine purchased for Rs 50 lakh has an estimated economic life of 10 years. After 6 years, the valuer estimates remaining life at 3 years because of faster technological change. Which concept does the reduced remaining life illustrate?

  1. Functional obsolescence Correct answer.
  2. Salvage value appreciation
  3. Physical deterioration
  4. Economic obsolescence

Explanation

Technological change that shortens the useful life of an existing machine is functional obsolescence, because a modern replacement makes the existing asset less efficient or costlier to operate. Physical deterioration relates to wear, and economic obsolescence to external market or regulatory factors.

Question 12Plant and Machinery Valuation

Which of the following is the best example of a direct cost that must be included in the replacement cost new of an installed machine?

  1. Freight, erection, and foundation costs Correct answer.
  2. The valuer's travel expenses
  3. The buyer's working capital
  4. The seller's marketing cost

Explanation

Replacement cost new includes all costs necessary to install the asset in place and ready for use, such as freight, erection, foundations, and commissioning. These direct costs are part of the installed cost. Valuer travel, buyer working capital, and seller marketing are not part of the asset's installed cost.

Question 13Plant and Machinery Valuation

In a plant and machinery valuation for a bank sanctioning a term loan, which value basis is most commonly required?

  1. Replacement cost new without depreciation
  2. Fair market value on a going-concern basis Correct answer.
  3. Original cost as per the fixed asset register
  4. Forced sale value or realisable value on a break-up basis

Explanation

Lenders typically require fair market value on a going-concern basis to assess the security cover for a term loan. Forced sale or break-up value may be sought as a secondary figure for stressed accounts. Replacement cost new without depreciation overstates value, and book cost does not reflect current worth.

Question 14Plant and Machinery Valuation

Which of the following best describes the term 'salvage value' in machinery valuation?

  1. The value of the machine after reconditioning
  2. The insurance value of the machine
  3. The estimated residual value of the machine at the end of its useful life Correct answer.
  4. The value of the machine when new

Explanation

Salvage value is the estimated amount realisable at the end of the asset's useful life, often as scrap or for parts. It is deducted before allocating depreciable cost over the life. Value when new is replacement cost, and reconditioned value is a restored value, not salvage.

Question 15Plant and Machinery Valuation

A valuer uses the sinking fund method to estimate depreciation of a machine. What does this method assume?

  1. Depreciation is a constant percentage of the reducing balance
  2. Depreciation is a constant amount each year with interest accumulated on the fund Correct answer.
  3. Depreciation is nil until the final year
  4. Depreciation equals the market value decline each year

Explanation

The sinking fund method assumes a constant annual provision that, with compound interest, accumulates to the replacement cost at the end of the life. It recognises that funds set aside earn interest. Reducing balance and market-decline methods are different concepts.

Question 16Plant and Machinery Valuation

A machine has a replacement cost new of Rs 80 lakh, an effective age of 8 years, and a total economic life of 20 years. Using the age-life method, what is the depreciated replacement cost?

  1. Rs 48 lakh Correct answer.
  2. Rs 80 lakh
  3. Rs 64 lakh
  4. Rs 32 lakh

Explanation

The age-life method applies the ratio of remaining life to total life to the replacement cost new. Remaining life is 20 minus 8, or 12 years, and 12 divided by 20 is 0.60; 0.60 multiplied by Rs 80 lakh gives Rs 48 lakh. The ratio of effective age to total life, 0.40, is the depreciation percentage.

Question 17Plant and Machinery Valuation

Which of the following is a limitation of the Market Approach when valuing plant and machinery?

  1. It is only applicable to buildings
  2. It ignores the physical condition of the asset
  3. It cannot reflect current market conditions
  4. It requires reliable data on comparable transactions, which is often scarce for specialised machines Correct answer.

Explanation

The Market Approach depends on observable transactions in comparable assets, and such data is frequently unavailable for specialised or custom-built machinery. It does reflect current market conditions when good data exists. It can consider condition through adjustments, and it is not limited to buildings.

Question 18Plant and Machinery Valuation

In the context of plant and machinery valuation, what is 'effective age'?

  1. The age of the machine's manufacturer
  2. The age at which the machine was last insured
  3. The age indicated by the condition and utility of the machine, which may differ from its actual age Correct answer.
  4. The chronological age of the machine since purchase

Explanation

Effective age reflects the actual condition and remaining utility of the asset, which can be more or less than its chronological age depending on maintenance and usage. It is used in the age-life method to estimate depreciation. Chronological age is simply the time since acquisition.

Question 19Plant and Machinery Valuation

A valuer is assessing a machine that has been well maintained and has an effective age lower than its chronological age. What is the likely effect on the depreciated replacement cost?

  1. It will be unaffected because age-life uses only chronological age
  2. It will be higher than if chronological age were used Correct answer.
  3. It will be equal to the scrap value
  4. It will be lower than if chronological age were used

Explanation

A lower effective age means a higher proportion of remaining life, so the depreciated replacement cost is higher than if the full chronological age were applied. Effective age captures superior maintenance and condition. The method is sensitive to this distinction.

Question 20Plant and Machinery Valuation

Which of the following best describes 'reproduction cost new' as distinct from 'replacement cost new'?

  1. The cost of the asset at the time of original purchase
  2. The cost of a modern equivalent asset with equivalent utility
  3. The cost of an identical replica using current prices and methods Correct answer.
  4. The cost of the asset less depreciation

Explanation

Reproduction cost new is the cost to construct an exact replica of the asset at current prices. Replacement cost new is the cost of a modern equivalent with equivalent utility, which may be more efficient. The distinction matters when technology has changed.

Question 21Plant and Machinery Valuation

Under the Income-tax Act, 1961, additional depreciation on new plant and machinery is available to which category of assessees?

  1. Assessees engaged in the business of manufacture or production of articles or things Correct answer.
  2. Assessees engaged only in trading
  3. All assessees engaged in any business
  4. Assessees engaged only in professional services

Explanation

Additional depreciation is available to assessees engaged in the manufacture or production of articles or things or in the generation, transmission, or distribution of power. It is not available to pure traders or professionals. The asset must also be new plant and machinery meeting the statutory conditions.

Question 22Plant and Machinery Valuation

A valuer is valuing a fleet of diesel generators. Which factor is most relevant in assessing economic obsolescence for these assets?

  1. The colour of the generator casing
  2. The number of bolts used in the frame
  3. The brand of the control panel
  4. The availability of cheaper grid power or stricter emission norms Correct answer.

Explanation

Economic obsolescence arises from external factors such as cheaper alternative power or stricter emission regulations that make the asset less economic to run. Cosmetic factors, bolt counts, and panel brands affect condition or specification, not external obsolescence.

Question 23Plant and Machinery Valuation

Which of the following is the most appropriate treatment of the cost of dismantling and removal in a plant and machinery valuation?

  1. It is always added to the asset value
  2. It is added to the salvage value
  3. It is ignored in all valuations
  4. It may be deducted as a cost to realise value when the asset is valued on a disposal basis Correct answer.

Explanation

When an asset is valued on a disposal or break-up basis, the costs of dismantling and removal reduce the net realisable amount and are therefore deducted. On a going-concern basis they are generally not deducted. They are not always added, nor always ignored.

Question 24Plant and Machinery Valuation

In a valuation report for plant and machinery, which of the following is an essential disclosure?

  1. The supplier's profit margin
  2. The names of all employees of the plant
  3. The valuer's personal investment portfolio
  4. The basis of value, valuation date, and assumptions and limiting conditions Correct answer.

Explanation

A valuation report must state the basis of value, the valuation date, the scope of work, and the assumptions and limiting conditions so the reader can understand what was valued and on what terms. Personal financial details, employee names, and supplier margins are not required disclosures.

Question 25Plant and Machinery Valuation

A machine's replacement cost new is Rs 1 crore. The valuer estimates functional obsolescence of Rs 10 lakh and economic obsolescence of Rs 5 lakh, with no physical deterioration. What is the value under the Cost Approach?

  1. Rs 85 lakh Correct answer.
  2. Rs 1 crore
  3. Rs 75 lakh
  4. Rs 90 lakh

Explanation

Under the Cost Approach, all forms of depreciation are deducted from replacement cost new. Here Rs 1 crore minus Rs 10 lakh functional obsolescence minus Rs 5 lakh economic obsolescence equals Rs 85 lakh. Physical deterioration is stated to be nil, so no further deduction applies.

Question 26Plant and Machinery Valuation

Under the straight-line method, a machine with an acquisition cost of Rs 40 lakh, an estimated salvage value of Rs 4 lakh, and a useful life of 9 years has annual depreciation of which amount?

  1. Rs 3.60 lakh
  2. Rs 4.00 lakh Correct answer.
  3. Rs 4.44 lakh
  4. Rs 5.00 lakh

Explanation

Straight-line depreciation spreads the depreciable base - cost less salvage value - evenly over the useful life. The base is Rs 40 lakh minus Rs 4 lakh, i.e. Rs 36 lakh, divided by 9 years, giving Rs 4 lakh per year. Salvage value must be deducted before dividing, which is the step that separates this from a simple cost-over-life calculation.

Question 27Plant and Machinery Valuation

In plant and machinery valuation, 'obsolescence' is best distinguished from physical deterioration because obsolescence refers to which of the following?

  1. Loss of value from causes other than physical use, such as technological or market change Correct answer.
  2. Loss of value from wear, corrosion and tear arising through use
  3. Loss of value caused solely by inadequate maintenance records
  4. Loss of value arising only from legal restrictions on title

Explanation

Obsolescence captures value loss from non-physical causes - technological improvement, changed demand, or legal and locational factors - that would reduce value even in a well-maintained asset. Physical deterioration, by contrast, is the loss attributable to use and the passage of time. Keeping the two causes separate matters because each is measured and deducted differently in the cost approach.

Question 28Plant and Machinery Valuation

A valuer is asked to state the value of plant and machinery on a 'going concern' basis for a company being sold as a running business. Which premise does this basis assume?

  1. The assets will be sold piecemeal at auction within a short period
  2. The assets will continue in their present productive use as part of an operating business Correct answer.
  3. The assets will be scrapped and valued at metal content
  4. The assets will be repossessed by the lender and resold

Explanation

Going concern assumes the business continues to operate and the assets keep contributing to an assembled, functioning unit, so their value reflects that continuing use. It contrasts with forced-sale and orderly-disposal premises, where the assets are broken out of the business. The premise chosen drives the approach and the comparables used.

Question 29Plant and Machinery Valuation

Which cost item is properly treated as an indirect cost when building up the replacement cost new of an installed machine?

  1. Foundation and erection charges paid to the installation contractor
  2. Freight and transit insurance paid to bring the machine to site
  3. The invoice price of the machine from the manufacturer
  4. Consultant fees for engineering design and project management Correct answer.

Explanation

Indirect costs are those not attributable to the asset itself but necessary to bring it into service, such as design, engineering, project management and financing costs. Direct costs are the asset price plus freight, insurance, foundation and erection. The split matters because indirect costs are often allocated as a percentage of direct cost.

Question 30Plant and Machinery Valuation

A valuer inspects a press whose nameplate capacity is 200 tonnes but which is currently operated at only 120 tonnes because of a bottleneck downstream. In the cost approach, this underutilisation is best classified as which of the following?

  1. Functional obsolescence, since the press is oversized for the line
  2. Physical deterioration, since the press is being used
  3. Economic obsolescence, since the loss arises from external operating conditions Correct answer.
  4. Curable physical deterioration, since the bottleneck can be removed

Explanation

The press itself is technically sound; the loss of utility comes from conditions outside the asset, namely the downstream bottleneck in the surrounding plant. That is the hallmark of economic obsolescence, which is measured by capitalising the income or cost penalty caused by the external condition. It is not a defect in the asset's design or its physical condition.

Question 31Plant and Machinery Valuation

A machine with a replacement cost new of Rs 60 lakh has an effective age of 5 years and a total economic life of 25 years. Using the age-life method, what is its depreciated value?

  1. Rs 50 lakh
  2. Rs 48 lakh Correct answer.
  3. Rs 36 lakh
  4. Rs 12 lakh

Explanation

The age-life method applies a ratio of effective age to total economic life to the replacement cost new. Here 5/25 equals 20 per cent depreciation, so 20 per cent of Rs 60 lakh, i.e. Rs 12 lakh, is deducted, leaving Rs 48 lakh. Using effective rather than chronological age is what makes the ratio reflect actual condition and utility.

Question 32Plant and Machinery Valuation

A valuer must estimate the value of a specialised ladle crane built to a design unique to one steel plant, with no second-hand market. Which valuation approach is most defensible?

  1. Market approach using comparable crane sales
  2. Cost approach using depreciated replacement cost Correct answer.
  3. Income approach using the crane's standalone rental yield
  4. Direct comparison with the scrap value of structural steel

Explanation

Where an asset is specialised and rarely traded, there is no reliable comparable evidence and no independent income stream attributable to the asset alone. The cost approach, using replacement cost new less physical deterioration and obsolescence, is then the standard method. This is the classic setting for depreciated replacement cost.

Question 33Plant and Machinery Valuation

In machinery valuation, what does 'curable' mean when applied to an item of depreciation?

  1. The defect can be remedied at a cost that is justified by the value added Correct answer.
  2. The defect can be transferred to the buyer under the sale contract
  3. The defect will disappear once the machine is repainted
  4. The defect can be ignored because it does not affect output

Explanation

A deficiency is curable when the cost of remedying it is less than or equal to the value the remedy adds; otherwise it is incurable and is measured as a capitalised loss. This test applies to both physical and functional deficiencies. It is an economic test, not merely a question of whether a repair is physically possible.

Question 34Plant and Machinery Valuation

Which statement correctly describes the relationship between reproduction cost new and replacement cost new?

  1. Reproduction cost replicates the identical asset; replacement cost uses a modern equivalent with the same utility Correct answer.
  2. Reproduction cost is always lower because it ignores installation
  3. Both terms are synonyms and may be used interchangeably in a valuation report
  4. Replacement cost replicates the identical asset; reproduction cost uses a modern equivalent

Explanation

Reproduction cost new prices an exact replica of the subject asset, using the same materials and method. Replacement cost new prices a modern asset of equivalent utility, which is usually cheaper and is the more common basis for insurance and financial reporting. The choice affects the size of the functional obsolescence deduction.

Question 35Plant and Machinery Valuation

A valuer is preparing a report for a bank taking plant and machinery as security for a working capital facility. Which value should normally be reported as the primary figure for the lender's purpose?

  1. Forced sale value or realisable value on an orderly disposal basis Correct answer.
  2. Fair market value on a going-concern basis
  3. Original book value as per the fixed asset register
  4. Replacement cost new without depreciation

Explanation

A lender's concern is recovery if the borrower defaults, so the relevant figure is what the assets would realise on disposal, often expressed as forced sale or realisable value. Going-concern value is higher because it presumes a continuing business and is of limited use as security cover. Reporting the appropriate basis, and stating it clearly, is a core disclosure requirement.

Question 36Plant and Machinery Valuation

A valuer uses the sinking fund method of depreciation. Which assumption underlies this method?

  1. Depreciation increases over the life of the asset as the fund accumulates Correct answer.
  2. Depreciation is highest in the early years and declines thereafter
  3. Depreciation is recognised only when the asset is sold
  4. Depreciation is constant each year over the asset's life

Explanation

The sinking fund method assumes that the annual charge should equal the amount that, if invested at a compound rate, accumulates to the depreciable base by the end of the life. Because the fund grows, the annual depreciation charge rises over time. It therefore produces lower charges in early years than the straight-line method.

Question 37Plant and Machinery Valuation

An installed machine has a replacement cost new of Rs 1 crore. The valuer identifies functional obsolescence of Rs 8 lakh and economic obsolescence of Rs 5 lakh, with no physical deterioration. What is the value under the cost approach?

  1. Rs 1 crore
  2. Rs 92 lakh
  3. Rs 87 lakh Correct answer.
  4. Rs 95 lakh

Explanation

The cost approach deducts all forms of depreciation from replacement cost new, including functional and economic obsolescence as well as physical deterioration. Here Rs 1 crore less Rs 8 lakh less Rs 5 lakh gives Rs 87 lakh. Deducting only one category would leave the asset overstated.

Question 38Plant and Machinery Valuation

In the market approach to machinery valuation, what does the term 'normalisation' of comparable sale prices mean?

  1. Converting all prices to a common date and adjusting for differences in condition, capacity and accessories Correct answer.
  2. Excluding all comparables older than five years
  3. Rounding each comparable price to the nearest lakh
  4. Averaging the highest and lowest prices in the sample

Explanation

Normalisation makes heterogeneous transactions comparable by bringing prices to a common basis, typically through time adjustment and adjustments for specification, condition, capacity and included accessories. Without it, the raw prices reflect differences between assets rather than the subject's value. Averaging or filtering the sample is a separate, later step.

Question 39Plant and Machinery Valuation

A valuer is assessing the insurance value of a turbine. Which amount most appropriately represents the sum insured?

  1. Depreciated value reflecting the turbine's current age
  2. Original purchase price paid a decade ago
  3. Reinstatement cost new including freight, erection and taxes, without deduction for depreciation Correct answer.
  4. Forced sale value of the turbine on disposal

Explanation

Insurance cover is intended to fund full reinstatement after a loss, so the sum insured is the new replacement cost including freight, erection and applicable taxes, with no deduction for depreciation. Deducting depreciation would leave the insured unable to replace the asset. Market or forced sale values are irrelevant to reinstatement.

Question 40Plant and Machinery Valuation

Under the Income-tax Act, 1961, plant and machinery used in a business is grouped into which broad block for depreciation purposes?

  1. Buildings, furniture and plant and machinery, each with a single common rate
  2. Plant and machinery at 15 per cent, with higher rates for specified energy-saving and pollution-control equipment Correct answer.
  3. Plant and machinery at 5 per cent, with no special rates for any equipment
  4. Plant and machinery at 25 per cent uniformly for all industries

Explanation

The Income-tax Rules prescribe block-of-asset depreciation, with general plant and machinery at 15 per cent and accelerated rates for specified assets such as energy-saving devices and pollution-control equipment. The block concept means assets in the same block pool their written-down value. Special rates exist precisely because general and specified equipment are treated differently.

Question 41Plant and Machinery Valuation

A valuer is asked to allocate the purchase price of a running factory between land, building and plant and machinery. Which principle best guides the allocation?

  1. Allocate equally among the three components
  2. Allocate the entire price to plant and machinery because it is the productive asset
  3. Allocate strictly in proportion to original book values
  4. Allocate on the basis of the relative fair values of each component as if separately acquired Correct answer.

Explanation

Where a bundle of assets is acquired for a single price, the price is allocated according to the relative fair values of the components. This reflects what a buyer would pay for each element in the market. Equal or book-value allocation has no economic basis and would misstate the machinery component.

Question 42Plant and Machinery Valuation

Which item is most appropriately excluded from the plant and machinery valuation of a manufacturing unit?

  1. A standby generator housed in the utility block
  2. A packaged boiler forming part of the process steam system
  3. Raw material inventory awaiting processing in the store Correct answer.
  4. A CNC machine bolted to a dedicated foundation

Explanation

Plant and machinery covers the apparatus used in production and its necessary installations, whereas raw material inventory is circulating capital and is valued as stock-in-trade. Including inventory would double-count working capital in the valuation. The boundary is functional: is the item an enduring means of production or a consumable input?

Question 43Plant and Machinery Valuation

A valuer finds that the cost of a modern control system retrofit to an older machine is Rs 6 lakh, while the retrofit would add Rs 9 lakh to the machine's value. How should this functional deficiency be classified and measured?

  1. Curable, with Rs 9 lakh deducted as the value added
  2. Incurable, with Rs 6 lakh deducted as the cost of the retrofit
  3. Curable, with Rs 6 lakh deducted as the cost of curing Correct answer.
  4. Incurable, with Rs 9 lakh deducted as the value added

Explanation

A deficiency is curable when the cost of the remedy is less than the value it adds; here Rs 6 lakh is below Rs 9 lakh, so it is curable and measured by the cost of the cure. The deduction is the cost to cure, not the value added. This distinction prevents over-deducting for deficiencies that a rational owner would remedy.

Question 44Plant and Machinery Valuation

A valuer must estimate the remaining useful life of a 12-year-old injection moulding machine that has run three shifts daily and shows barrel wear. Which combination of evidence is most relevant?

  1. Maintenance history, operating hours, condition assessment and the manufacturer's design life Correct answer.
  2. Chronological age alone, since the machine is 12 years old
  3. The resale prices of new injection moulding machines of similar tonnage
  4. The machine's original invoice value and its current book value

Explanation

Remaining useful life depends on how hard the asset has worked and how well it has been maintained, so operating hours, maintenance records, physical condition and the design life are jointly relevant. Chronological age alone ignores intensity of use. New machine prices bear on replacement cost, not on the subject's remaining life.

Question 45Plant and Machinery Valuation

A plant's machinery was designed to run on imported fuel that is now subject to a steep tariff, while an abundant domestic fuel is available but requires burner replacement. Which classification and treatment is most appropriate?

  1. Curable functional obsolescence measured as the value added by the new burners
  2. Functional obsolescence, deducted at the cost of the burner replacement
  3. Economic obsolescence, deducted by capitalising the operating cost penalty Correct answer.
  4. Physical deterioration, deducted at the cost of the burner replacement

Explanation

The loss arises from an external change - the tariff on imported fuel - rather than from the asset's design, so it is economic obsolescence. It is measured by capitalising the excess operating cost caused by the external condition. The burner replacement is the remedy for the external penalty, not a defect in the asset itself.

Question 46Plant and Machinery Valuation

A valuer values a machine at Rs 50 lakh on a going-concern basis but notes that a forced sale within 90 days would realise only Rs 32 lakh. How should both figures appear in the report?

  1. Report the average of the two figures as the single value
  2. Report only the forced sale figure, since it is the more conservative
  3. Report both figures with the premise and assumptions clearly stated for each Correct answer.
  4. Report only the going-concern figure, since forced sale value is not a recognised basis

Explanation

Different bases answer different questions, and a report should state the basis adopted and disclose alternatives where they are relevant to the user. Reporting both figures with their premises lets a lender assess security while a buyer sees going-concern worth. Presenting a single blended figure conceals the premise and misleads both users.

Question 47Plant and Machinery Valuation

A valuer is reconciling two indications of value for a process plant: Rs 90 lakh from the cost approach and Rs 1.1 crore from the market approach. Which consideration is most relevant in weighting them?

  1. Give equal weight because both approaches are always equally reliable
  2. Weight the market approach more heavily where close, recent and verifiable comparables exist for similar assets Correct answer.
  3. Discard both and use the written-down book value
  4. Weight the cost approach more heavily because it uses documented invoices

Explanation

The weight given to each approach depends on the quality and relevance of the evidence behind it. Where genuinely comparable, recent and verifiable transactions exist, the market approach is persuasive; where the asset is specialised, the cost approach carries more weight. Mechanical equal weighting ignores evidence quality.

Question 48Plant and Machinery Valuation

Which of the following best describes the role of a physical verification report in a plant and machinery valuation?

  1. It establishes the asset's income-generating capacity for the income approach
  2. It replaces the need for a cost approach because condition is observed directly
  3. It fixes the market value of each asset without further analysis
  4. It confirms existence, identification, condition and location of the assets recorded in the register Correct answer.

Explanation

Physical verification links the fixed asset register to the assets actually present, recording identification, condition and location. It is evidence gathering, not valuation itself. Discrepancies found during verification must be reconciled before value is attributed to the register.

Question 49Plant and Machinery Valuation

In the cost approach, which treatment of dismantling and removal costs is correct when the premise is continued use of the asset in place?

  1. Deduct them from the asset's value as a cost of disposal
  2. Add them only where the asset is imported
  3. Ignore them entirely because the asset is not being sold Correct answer.
  4. Add them to replacement cost new as a cost of ownership

Explanation

Under a continued-use premise the asset is not being removed, so dismantling costs are not incurred and are neither added to cost nor deducted from value. They become relevant under a disposal or liquidation premise, where they reduce net realisable proceeds. Applying them under the wrong premise distorts value in either direction.

Question 50Plant and Machinery Valuation

A valuer is engaged to value plant and machinery for a merger scheme. Which attribute of the valuation is most critical for the engagement to be useful to the tribunal and shareholders?

  1. Use of the highest possible value conclusion
  2. Independence and objectivity of the valuer, supported by stated methodology Correct answer.
  3. Avoidance of any disclosure of assumptions to protect confidentiality
  4. Speed of delivery before the scheme meeting

Explanation

Valuations supporting a scheme of arrangement are relied upon by shareholders and scrutinised by the tribunal, so independence, objectivity and a transparent methodology are essential. The value conclusion must be defensible, not maximised. Concealing assumptions undermines the credibility of the report.