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The infographic above concludes the simplified version of the machinery and
equipment valuation process. We are now going to delve a bit deeper into the
infographic as it relates to the finer points of the USPAP publication. We will quote
heavily from the Appraisal Foundation (and refer to them interchangeably as
"Appraisal Standards Board" [ASB] and "USPAP") throughout, as they are
recognized by Congress as the source of appraisal standards.
For those of you that didn't vacate the premises after learning that the simple part
was over, heres my take on the valuing machinery and equipment insights from
the infographic:
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Financial Institutions
Government Officials
Individuals (e.g., inheriting a
machine)
Law Firms & Attorneys
Merger & Acquisition Professionals
Turnaround Management Specialists
The client and all intended users should be clearly identified in the appraisal report.
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your appraisal findings are based on these conditions, and your opinions could
change if the expected outcome doesn't come to fruition.
Extraordinary Assumptions
Our Desktop Equipment Appraisals are a great example of extraordinary
assumptions. We don't physically inspect the equipment in a desktop appraisal, so
we base our opinions on things we believe to be true, based on information
provided by the equipment owner, phone calls to mechanics, photos, etc.
Hypothetical Condition
A hypothetical condition example as it relates to machinery valuation might be a
front loader that is in the process of an engine rebuild. Most any machine without
an engine is worth less on the open market than a fully functional one. As such, we
base our value conclusion on the expectation that the engine is rebuilt or replaced
with a new one.
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process (an aggregate plant, for example)? Or does the appraiser plan to identify
the individual characteristics of the equipment (make, model, year, etc.)?
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If the assignment isn't a plant, but equipment valuation for a fleet of rolling stock
(trucks, construction equipment, trailers, etc.), we take a different approach
to identifying characteristics. In this scenario, we are more interested in capturing
and recording equipment characteristics such as year, make (Caterpillar, John
Deere, etc.), model, serial number or VIN, and hours/miles.
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The sales comparison equipment valuation approach is best applied when there
exist many sales of the same, or very similar machines.
Current Cost
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Specifically, we're looking at current cost of the machine, as if it were new. Clearly, a
machine is never new after leaving the factory and we often appraise equipment
that isn't new in this decade. So how do we arrive at the current cost of that?! To
do so, we first consider the Replacement Cost New approach, then move onto the
Reproduction Cost New approach, if necessary.
Replacement Cost New
What is the cost of replacing the the subject machine with the current-dayequivalent? That is replacement cost.
Reproduction Cost New
If it is more economical (cheaper) to reproduce the same exact item (or the same
exact item is still being manufactured), we will use the reproduction cost approach.
Depreciation
Appraisal depreciation is different than the accountancy term "depreciation" and
consists of functional and economic obsolescence and physical deterioration.
Now that you know a bit about current cost and depreciation, as they relate to
appraisals, we could really de-simplify the equation above to be:
Cost Approach = (Replacement Cost or Reproduction Cost) - (Physical
Deterioration + Functional Obsolescence + Economic Obsolescence)
The cost equipment valuation approach is best applied when dealing with unique
property and there don't exist many sales of the same subject property (thus,
unable to apply the sales comparison approach).
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The income technique to equipment valuation includes many steps and variables,
requires making assumptions, and necessitates complex mathematical calculations.
Even with the amount of work required for the income approach, the end result is
still only speculative, and thus, isn't utilized as often as the preceding approaches to
machinery valuation.
Still, there are scenarios where the income approach fits perfectly. A good time to
use the income technique might be for a plant and machinery valuation assignment
- like the aggregate plant example discussed in step 2 above.
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The depth of this step will vary from appraiser to appraiser, based on
their experience (and/or imagination), so this might be a good series of questions
to ask when considering appraisers.
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appraisal before the final delivery. The point of this isn't to allow for biased
opinions to persuade values, or any other reason but to help identify omissions or
miscommunications - and ultimately, make any necessary reconciliations.
Once all sides are confident that no blatant errors exist, put the final touches on the
machinery and equipment appraisal report, and deliver it to the client and intended
users.
Simple, right?!
Now we can dust our hands from this appraisal project, burn all of our
research behind us, and move on to the next appraisal assignment, right? Not so
fast! According to the USPAP Record Keeping Rule:
An appraiser must retain the workfile for a period of at least five years after preparation
or at least two years after final disposition of any judicial proceeding in which the
appraiser provided testimony related to the assignment, whichever period expires last. retrieved from http://uspap.org/#/26/
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