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Machinery and Equipment Appraisals
All of our machinery and equipment (M&E) appraisal work is supervised and performed by certified appraisers and engineers. These appraisals conform to the Uniform Standards of Professional Appraisal Practice (USPAP). The steps in a typical machinery and equipment appraisal assignment include:
Identifying the assets to be appraised
Defining the purpose of the appraisal
Establishing the valuation date for the appraisal
Determining the appropriate valuation concepts and approaches to be utilized
Determining the type of valuation study to be completed
Selecting the type of appraisal report to be provided
Checking the availability of data and information
IDENTIFICATION OF ASSETS
M&E consists of machinery, furniture, fixtures, office and telecommunications equipment, computer and networking equipment, vehicles, etc. Appraisals can be performed for individual pieces of equipment, a production line, a complete operating facility, or multiple operating facilities.
PURPOSE OF THE APPRAISAL
An equipment appraisal can have many purposes including, but not limited to:
Accounting
Financing
Insurance
Leasing
Liquidation and bankruptcy
Management Planning
Tax
VALUATION DATE
The valuation date is important because it sets the exact date at which the value is determined, and establishes the context for the opinion of value.
VALUE CONCEPTS AND APPROACHES
An appraisal can utilize different types of valuation concepts. Some of the typical concepts for an equipment valuation include:
Fair Market Value In Continued Use
Fair Market Value - Installed
Fair Market Value - Removal
Orderly Liquidation Value In Place
Orderly Liquidation Value
Forced Liquidation or Auction Value
Salvage Value
Scrap Value
Insurance Replacement Cost
Insurance Value Depreciated
The definitions of these concepts as defined by Valuing Machinery and Equipment, the American Society of Appraisers (2000), are as follows:
Fair Market Value In Continued Use is the estimated amount, expressed in terms of money, that may reasonably be expected for a property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date, and assuming that the earnings support the value reported.
Fair Market Value - Installed is the estimated amount, expressed in terms of money, that may reasonably be expected for an installed property in an exchange between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell, and both fully aware of all relevant facts, including installation, as of a specific date. This amount does not have to be supported by the business earnings.
Fair Market Value - Removal is the estimated amount, expressed in terms of money, that may reasonably be expected for a property, between a willing buyer and a willing seller, with equity to both, neither under any compulsion to buy or sell and both fully aware of all relevant facts, as of a specific date, considering the cost of removal of the property to another location.
Orderly Liquidation Value In Place is the estimated gross amount, expressed in terms of money, that could typically be realized from a failed facility, assuming that the entire facility would be sold intact within a limited time to complete the sale, as of a specific date.
Orderly Liquidation Value is the estimated gross amount, expressed in terms of money, that could be typically realized from a liquidation sale, given a reasonable period of time to find a purchaser(s) with the seller being compelled to sell on an as is, where is basis as of a specific date.
Forced Liquidation or Auction Value is the estimated gross amount, expressed in terms of money, that could be typically realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as is, where is basis, as of a specific date.
Salvage Value is the estimated amount, expressed in terms of money, that may be expected for the whole property or a component of the whole property that is retired from service for use elsewhere, as of a specific date.
Scrap Value is the estimated amount, expressed in terms of money, that could be realized for the property if it were sold for its material content, not for a productive use, as of a specific date.
Insurance Replacement Cost is the replacement cost new as defined in the insurance policy less the replacement cost new of the items specifically excluded in the policy, if any, as of a specific date.
Insurance Value Depreciated is the insurance replacement cost new less accrued depreciation considered for insurance purposes as defined in the insurance policy or other agreements, as of a specific date.
INCOME, COST, AND MARKET APPROACHES TO VALUE
The income approach is based on the present value of cash flow that an asset can be expected to generate during its remaining life. This approach is based on a forecast of the business income and expenses that the property will generate over a given period of time. It assumes that the value of the property is dependent on the ability of all the assets to earn a reasonable return. This approach is best utilized for determining the business enterprise value.
The cost approach is based on the concept of replacement or reproduction cost as an indicator of value. A prudent investor would not be expected to pay more for an item than the amount for which it could be purchased new. Further, to the extent that a particular item provides less utility than a new one, its value will be less than the cost of a new replacement or reproduction. To account for this difference, the replacement/reproduction cost new is adjusted for losses in value due to physical depreciation, functional obsolescence, and economic obsolescence.
The market approach involves a direct comparison of the property being appraised to similar properties that have sold in the same or in a similar market. This approach is based on the principle of substitution which implies that a prudent person will not pay more to buy a property than it will cost to buy a comparable substitute property.
TYPES OF VALUATION STUDIES
There are typically three types of studies that can be performed during an equipment valuation. The three being inventory, site inspection, and desktop.
The inventory appraisal is utilized when an accurate asset listing does not exist. This approach requires a detailed inventory and inspection of all the assets.
The site inspection appraisal involves a detailed inspection of a representative portion of the assets. This inspection is utilized to determine the physical condition, and to verify the existence of the major assets.
A desktop appraisal is utilized when timing is short, or a site visit is not required. A detailed asset listing must be provided and personnel familiar with the assets should be available to discuss their condition.
TYPES OF APPRAISAL REPORTS
Under USPAP, there are three types of reports for equipment appraisals: Self-Contained, Summary, and Restricted Use. The essential difference among the three reports is in the content, level of detail and information provided. The Self Contained report is the most detailed of the three. The Restricted Use report is utilized when the client will be the only party relying on that report.
AVAILABILITY OF DATA AND INFORMATION
The availability of data is important in determining the timing and cost of the appraisal. The data typically required for completing the appraisal includes asset listings, purchase orders, invoices, maintenance logs, and financial statements.
Please continue browsing our site to learn more about all of the services available from Appraisal Economics. We pride ourselves in offering independent valuations services to the business, financial and legal communities, including business appraisals, and ASC 805 and 350 (formerly FASB 141 and 142) related valuations.
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