Sergey Smolyak

We propose a model for the valuation of machinery and equipment items which accounts for the possibility of their failures. Dealing with the consequences of such failures requires either the scrapping of equipment, or having the equipment to undergo repairs, following which the condition of it improves in a random way. The value of a machine is determined by reference to its highest and best use. Such a method presupposes, at any time, making an optimal choice as between the options for utilizing the machine for its intended purpose, its repair or disposal. The model also takes into account the fact that some technical and economic performance characteristics of the machine deteriorate with its age, and that some operating costs (such as property tax and insurance costs) are, in turn, dependent on the underlying value of the machine. To achieve solutions in this context, we apply a non-conventional version of the discounted cash flow analysis which only requires relying on the information related to the valuation date. Forecasting changes in market conditions over the coming lifetime of the machine is not required. Thus, we present the results of modelling that allow identifying the impact of durability, failure rate and maintainability on the value of machinery and equipment items of a different age.