The estimation of declining operation returns for industrial property

Abstract

<p>Computation of a cost evidence of value using the present worth principle normally assumes a uniform stream of future operation returns. Elfar proposed a method of incorporating a decreasing stream of operation returns into the present worth computation('1). The rate at which the operation returns decrease was determined by the progression rate selected for the model;This study proposes two methods for estimating the progression rate term based on data measured or colleccted in the field. The first of these, the Ratio Method, is based on relating a ratio of the operation returns for a new unit and those for an aged unit to the progression rate exhibited. The progression rate term is solved for using a trial and error procedure. Though the Ratio Method works well when adequate data are available, the general lack of such data makes this method inappropriate in most cases;The second method proposed is the Delta Method. This method is based on relating the decrease in operation returns from period 1 to period x to the progression rate exhibited by the property. A set of standard curves based on the predicted lifespan, discount rate, and salvage ratio are used to estimate the progression rate;Major conclusions of the study are that the Elfar model can be applied to the valuation of an industrial property, that either the proposed Ratio or Delta Methods may be used to estimate the progression rate, and that judgement still must be exercised in the valuation process;(');('1)A. A. Elfar, "Valuation of Machinery and Equipment for Industrial Properties," Ph.D. thesis, Iowa State University, 1976 (unpublished).</p>