5.2 Recommended Steps

5.2 Recommended Steps

This section describes the specific steps involved in the four basic activities addressed in this chapter: identifying treatments; determining treatment costs and effects; determining asset useful life; and determining residual value.

Identify Treatments
Identifying Treatments
  1. Step 1 – Review Treatment Data:

    For each asset class and type of component being valued, review the asset lifecycle strategy and/or other available agency data to determine what treatments are typically performed on an asset class or component, and what treatment data are consistently tracked.

  2. Step 2 – Identify Mandatory Treatments:

    Identify treatments that will be considered independently in the valuation calculation, in addition to the initial construction or acquisition of an asset. These include treatments that reset the asset age or restore an asset to “like new” condition.

  3. Step 3 – Select Potential Additional Treatments:

    Determine whether additional treatments should be considered in the analysis. Consideration of additional treatments is typically unnecessary for calculating current asset value, but can be important for predicting future value. Treatments may be added to the analysis if they have some impact on asset remaining life or condition and if adding them to the analysis will help support TAM decisions. Any treatments not explicitly modeled are assumed to occur based on the agency’s lifecycle policy.

Determine Treatment Costs and Effects
Determining Treatment Costs and Effects
  1. Step 1 – Collect Data on Past Treatments:

    Collect data on cost and treatment timing for each treatment being considered for each asset class and subcomponent. Data are not required for treatments that are assumed to occur and incorporated in the estimate of asset useful life.

  2. Step 2 – Assess Available Data:

    Decide whether historic data are sufficiently detailed to support use of actual costs, or if unit costs will be used to estimate changes in value from past treatments. For most applications it is more practical to use unit costs. An exception to this is where value is being calculated for a specific asset (e.g., a toll road) based on historic costs.

  3. Step 3 – Develop Treatment Unit Costs:

    Develop unit costs as described in Chapter 4, resulting in unit costs for each treatment.

  4. Step 4 – Determine Treatment Effects:

    For each treatment determine the effect the treatment has on an asset. The effect can be specified in terms of the change in asset life or the change in condition. Condition changes are equated to asset life in calculating depreciation, as described in Chapter 6.

Establish Asset Useful Life
Establishing Asset Useful Life
  1. Step 1 – Review Available Agency Data:

    Collect and review records on when assets have been replaced. Ideally data on past replacements should be accompanied by information on what motivated the replacement.

  2. Step 2 – Review Defaults and Past Assumptions:

    Review other sources of data for asset life assumptions, including information on treatments compiled as described in Section 5.2.1,  past calculations performed by the agency (e.g., for previous TAMPs or financial reports), asset-specific analyses, the defaults listed in Table 5.2, and the TAM literature.

  3. Step 3 – Specify the Useful Life by Asset Class/Component:

    Determine a useful life for each asset class and component being valued using either the agency’s data or the defaults. The useful life should be developed assuming treatments occur according to the agency’s lifecycle strategies.

    Refer to NCHRP Report 713 and Chapter 13 of OECD Measuring Capital for more discussion of advanced approaches for establishing asset useful life.

Determine Residual Value
Determining Residual Value
  1. Step 1 – Classify Assets and Components:

    For each asset class and component being valued, establish whether or not the asset is periodically rehabilitated or renewed using treatments that differ in cost from the initial purchase or construction of an asset. This determination depends on the nature of the treatments performed on the assets and the determination of which treatments are being modeled.

    Complex assets such as pavements and bridges are periodically rehabilitated or renewed. However, the analyst has the choice concerning whether to consider rehabilitation/renewal treatments or assume these occur according to the agency’s lifecycle strategy.

  2. Step 2 – Calculate Salvage Value:

    For assets not subject to periodic rehabilitation or renewal calculate the residual value as the salvage value of the asset, or the value obtained for an asset that has reached the end of its useful life and is being replaced. Refer to the OECD document Measuring Capital for discussion of how to establish this value for complex cases when the distribution of asset useful life cannot be easily approximated.

  3. Step 3 – Calculate the Cost Difference:

    For assets that are subject to periodic rehabilitation or renewal, calculate the residual value as the difference between the cost of initial purchase or construction and the cost of asset rehabilitation or renewal.