Estimated Plant Replacement Value

What is the estimated plant replacement value (PRV)?

The estimated plant replacement value (PRV) is the approximate cost to replace the present assets of the plant to achieve the same production capability.

Overview

The PRV, also known by other terms such as estimated replacement value (ERV) or replacement asset value (RAV), is a useful metric to quantify the current value of a plant. It is calculated by determining how much it would cost to build a similar plant with the same production capability.

PRV estimations would include the costs of building infrastructure, production equipment used within the plant, machineries used for operations, and other assets required to support plant operations. The value of the actual real estate or land property won’t be included, but the modifications done to the area to accommodate the plant are accounted. Note that you are concerned with the current value, and not the depreciated value of the assets.

Tools such as enterprise asset management (EAM) software could provide valuable financial data on the assets of the plant. Analyze and interpret the data available to more accurately approximate the PRV.

Given the definition of PRV, and the multiple approximate valuations required to come up with it, getting a perfectly accurate value would be impossible. Construction costs, capital costs of equipment, labor costs and all other valuations fluctuate over time. To help with the estimation, there are general methods used to calculate the PRV and to perform these calculations with an acceptable degree of certainty.

How to calculate the estimated PRV

As a guideline to estimate the PRV, the following methods are typically used. Note that some methods are more applicable to certain organizations, depending on the age of the plant and the availability of the data.

Calculate the actual capital cost of the project, with adjustments for inflation

A way to quantify the changes in the value of money is through factoring in inflation. Given that initial capital costs are well-documented, and inflation fluctuations are tracked consistently, this method would be the go-to process for estimating the PRV. Note that these calculations usually get less accurate with age – this would be an ideal method for plants that have been operating for ten years or less.

Use the plant’s insured asset value (IAV)

For cases when calculating costs based on inflation cannot be performed, the next best thing would be to base the PRV on a plant’s IAV. These values would be based on the insurance agreement, so they might equate to the PRV straightaway. Details of the insurance agreement (e.g. scope inclusions and exclusions) can help you identify necessary corrections to more accurately approximate the PRV from the IAV.

Compare with facilities of similar characteristics

If the previous methods cannot be carried out, the PRV can be approximated from the asset value of another plant with similar characteristics. As more uncertainties are introduced to the calculation by this method, it is usually regarded as the last resort among the three methods discussed.

With multiple processes available to come up with an estimated PRV, one might be curious to see the differences in valuation of each method. The PRVs generated by using different methods can be analyzed and compared to satisfy this curiosity. The gaps between valuations can provide useful insight in which method is most appropriate for your organization.

Relating maintenance costs to the PRV

One of the most common uses of the PRV metric is to compare it with the plant’s total maintenance cost. The sum of maintenance costs expressed as a percentage of the estimated PRV is a popular benchmark that attempts to characterize maintenance expenditures based on the company’s value.

The ideal value of the maintenance costs divided by the PRV is around two to three percent (2-3%). This is a very generalized benchmark across various industries. It is important to note that actual values would vary greatly depending on the industry and the plant’s specific mode of operation.

While keeping maintenance costs down could benefit an organization’s cost efficiency, it is highly advisable to specify the parameters by which costs are measured. In working with various groups and teams within the company, make sure that an agreement is in place when setting goals. For example, when basing cost reductions as a percentage of PRV, knowing the basis of the estimated PRV could mean the difference in performing decisions and setting realistic goals.