Useful life and salvage value assumptions are among the most consequential — and most frequently generalised — inputs in plant and machinery valuation. Applying a blanket assumption across asset types rather than sector-appropriate benchmarks is a common source of valuation error.
Why sector matters
Useful life isn't purely a function of an asset's physical durability — it's shaped by the operating environment, maintenance regime, and rate of technological change in the sector the asset serves.
- Manufacturing. Shift patterns dramatically affect wear rate, along with maintenance quality and how quickly the manufacturing technology is being superseded.
- Oil & gas. Harsh environments shorten useful life, but rigorous maintenance and integrity management regimes frequently extend functional life beyond simple age-based assumptions.
- Logistics and warehousing. Material handling equipment has more standardised, well-documented useful life data due to high transaction volume and widespread secondary market activity.
Salvage value — often underestimated or ignored
Salvage value (the residual value at the end of useful life, often scrap or component resale value) is frequently set to a flat percentage or ignored entirely. For sectors with active scrap metal markets or component resale value, a properly researched salvage value can meaningfully affect the depreciation calculation, particularly for older assets approaching end-of-life.
The adequacy check
Useful life and salvage assumptions should be periodically checked against actual asset disposal or replacement history within the same business where available — if equipment is consistently being replaced well before or after its assumed useful life, the underlying assumption needs revisiting for future valuations.
Practical recommendation
Request that any plant valuation report state the specific useful life and salvage value assumptions applied per asset category, along with the source or rationale — a report that states only a final depreciated figure without this detail can't be properly reviewed or challenged.