Tooling Corner: What is a mold worth?

Editor?s note: Bill Tobin is a plastics processing consultant and president of WJT Assoc.

How does one determine the value of a mold? This is an interesting question that comes up occasionally in consulting and sometimes even in lawsuits. What is a mold worth if your plant has a fire? What is a mold worth if it is delivered late and you lose business, or it is defective and cannot produce?

So what is a mold? A mold is tooling. You pay money for a mold, and you get a hunk of metal. However, when run in a molding machine, it generates sales. Without a mold, you cannot make money as a molder.

But, what is the mold really worth? The sales it generates? The profit you make? The mold?s replacement cost? The mold?s purchase price? All, some, or none of the above?

The IRS uses a simple valuation process. It is called basis value. It is simply the depreciated value of the mold?quite like what the insurance company does when your car is totaled in an accident. They look at what the car would sell for, and that?s its value.

The problem with this is that most companies take the tax advantage of tools and write off the purchase price the first year. Oops! In the second year (from a tax standpoint), the mold value is only the scrap value even though it is still pumping out parts. It?s an interesting maneuver with corporate taxes, but dumb if something happens and the mold cannot produce parts that are still necessary.

Accountants look at the value of a company as its book value plus its net earnings. If we view each mold as its own individual company, the value of a mold becomes easily measured.

First let?s look at the mold cost. This is easy. Dust off the purchase order and there it is. But if you run a mold for any length of time, you?ll put more money into it in the form of maintenance. High-volume molds or molds with complex mechanisms can require between 30 to 40 percent of inflation-adjusted value over the original tooling cost during the life of the tool. Low- to medium-volume molds with simple parting lines and no complex mechanisms need between 5 to 10 percent of the original cost in maintenance. While these rules of thumb tend to work, if you are molding acetal, PVC, highly-filled materials, or many of the high-heat engineering materials, your maintenance costs are even higher due to the nature of the material.

The money spent on the tool is the purchase price plus the maintenance cost. In our analogy where a mold is represented by a company, this is the book value of the mold.

Now let?s look at the molded parts. Some plastic parts have an infinite life span: gears, screws, drawer slides, medical products, lids, toothpaste caps, and a million other little (sometimes big) products which are in demand forever. A tool for such products has a useful life until it is worn out beyond any economical repair. Other plastic products have a definable, finite lifespan. Cell phone bodies are a particularly short-lived product. Toys might have the luxury of lasting for more than one year. Computer housings are always a gamble. And so it goes dependent upon the market.

If you multiplied the lifetime volume of the parts by the sales price, then multiplied by your net profit, you?d have the portion of the value of the mold the parts contribute to your company?s bottom line. Going again back to our analogy of a company, this is the net earnings expected out of the mold.

Now comes the tricky part. Many people would think you?d just add the two numbers, then do some depreciation magic to spread this number over a lifespan. While logical on the surface, you miss the reality of it.

When you first go into production the value of the tool is enormous. It is the total value of the tool (purchase price plus maintenance) plus the complete expectation of all the profit you intend to make running that tool. If the the product?s lifespan is five years, each year the value of the tool goes down by 1¼5 of the original value. At the beginning of the sixth year, you have no expectation of any business (profits) from this tool, nor do you have any use for it. At this point in time the value of the mold is only the salvage value of scrap metal if there is no expectation of business.

However, all of us have seen the dreaded Last Lifetime Production Run repeated years after the product concludes its normal life cycle. Thus the year after the last anticipated year of production the value of the mold is the last service year?s mold value alone. Since you cannot predict any future orders, you cannot assign any value/profit from molding.

A semi real-world example is shown in Table 1 (opposite page). Let?s say you have a job that is an open-ended contract to make LLDPE 4-inch diameter lids used in the food industry. Your customer tells you the average will be about 20 million lids annually. This contract is open-ended with no foreseeable obsolescence of this part in sight?lids will be used forever. You get a 24-cavity hot runner mold for $130,000. Since this will be a dedicated process, you buy the fastest molding machine and fully automate the process with an operator only to fill the boxes. You sell the lids for $2.10 per thousand. Your net profit after automation is 15 percent, or $.315 per thousand. You specify and have the mold built to run for 5 million-plus closures, or about six years of production. Your budget shows that even with a simple part like this, over six years you?ll probably put about 35 percent of the tool cost back into maintenance. Even with a high profit margin you only make $6300 per year in net (pretax) profit.

In the first year, the mold has its highest value: the full mold cost and maintenance plus the expectation of six years profit. By the sixth year, you?ve already spent most of your maintenance budget and received most of your profit. Since the mold?s value has been dropping by 1/6 per year its value is low. If this is an enduring contract, this is the year to consider retooling with a new generation mold. If you keep it as a back-up its value is the last year?s mold value only because you cannot predict whatever profits it might generate if you need to put it back into service. Table 2 (p. 19) shows a more typical part of a lower-volume and less-expensive tool.

Why is understanding the value of a mold so important? Even with a high-value insurance policy, if you have some kind of catastrophe, you?ll need records and proof to make a claim. Having a $10 million policy only means the insurance company won?t pay more than that value. It never means you?ll get all of it. Most molders keep records on computers? not very effective when the fire sprinklers baptize your hard drives for several hours. Others keep things in fireproof filing cabinets. This seems like a good idea until the fire department gets there with the high-pressure hoses. What happens if you are in a tornado or hurricane and your front office is spread over the next three counties and you now have an open-air molding shop?

Do a calculation similar to these tables and send it off to your insurance company as you get new molds. If you inherit molds from another molder, the mold value is its replacement cost, plus what you put into it to get it running, plus its anticipated maintenance cost. This way the insurance company has a record. One molder I know has a duplicate computer at his house. Every day at about 2 a.m. the office computers dump data into his home computer. This offsite backup can be a lifesaver.

The value of your molds can be a component of the value of your molding company. This is a nice number to have if you are selling the company. Mold values are also excellent to have when your attorney starts a fight with the insurance company to get your claim paid.

You can use this same technique with molding machines. Even with the worst-case disasters, most of the molding machine can be salvaged. Do machines have finite lives? Yes and no. Yes in the sense that technology continually changes and it obsoletes some machine technologies. No, in the sense you can reface platens, redrill and tap threaded holes, replace tiebars, replace screw and barrel combinations, refurbish hydraulics, and install new electronic controls, and have the equivalent of a new machine at a fraction of the cost. The only silliness your accountant may scream at is double dipping by saying the molds and machines generate profit. The machine?s value is its presence. It?s the mold that makes the profit.

Many readers might think that mold valuation is interesting but useless. Quite like the police, you think it is unnecessary until you need it, then you figure out the true value of a mold.

This article is excerpted from the CD version of Injection Mold Tooling Standards, sold by the IMM Book Club.