EQUIPMENT VALUATION SERVICES
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EXPECTED AUCTION VALUATION
NON-ESSENTIAL RETAIL VALUATION
EXPEDIOUS SALE VALUATION
SALE / PURCHASE OF ASSETS
IRS GIFT / CHARITABLE DONATIONS
There are many reasons for having an updated valuation of your equipment performed; insurance, financing, fiscal reports, banking, mergers, SEC requirements, surplus liquidation, taxes, estate planning, loss litigation, charitable donations and more. Ken Humanic has been assigning valuations to equipment for nearly 40 years and understands the myriad ways of placing true and honest values on equipment and machinery.
Cost Valuation Approach
Market Valuation Approach
Income Valuation Approach
COST VALUATION APPROACH
Principle of Substitution
The general premise of the cost approach in machinery and equipment valuations is the principle of substitution. The principle of substitution means that someone will not pay more for the asset being valued than what the individual can purchase a substitute asset that performs the same function or service.
The cost approach to machinery and equipment valuation involves determining the replacement cost of the asset and then subtracting any value that has been lost due to economic or functional obsolescence or physical deterioration.
The best starting point of determining the cost approach value is to identify the new replacement cost along with the ancillary expenses of a new acquisition.
New Replacement Cost
New replacement cost is what it would cost to acquire a new piece of equipment that performs the equivalent function of the piece of equipment being valued. This valuation is made by calculating the new replacement cost of a like machine and is to gather the direct and indirect costs acquiring the machine; including the cost of the equipment, direct labor for installation, freight, utility hook-ups, foundations, necessary sales tax and infrastructure modifications among other expenses. Indirect costs include engineering, administration costs, licenses and other related set-up and acquisition expenses.
Economic obsolescence is the loss of value of an asset due to outside factors. These factors may include law or ordinance changes, increased cost of raw materials, labor, utilities, financing ability or changes in the industry. These economic obsolescence factors may affect the value of the of the equipment.
Functional obsolescence is the loss of value of machinery and equipment due to not meeting the standards of more efficient and less costly replacements. Functional obsolescence occurs primarily when assets have become undesirable due to technological advancements.
Physical deterioration is the loss of value due to wear and tear on machinery and equipment. Machinery and equipment are manufactured with a useful life expectancy. While the machine is used the physical stress and exposure to the elements of the environment cause deterioration. Over time the performance of the machine may require additional maintenance expenditures to keep it in operating condition. Lack of maintaining equipment caused faster deterioration. A percentage of deterioration is assigned to a piece of equipment; a brand new piece of equipment having 0% physical deterioration and a machine that has been used to or beyond the life expectancy having 100% physical deterioration. Measuring physical deterioration is somewhat subjective and it requires a knowledgeable valuator to accurately determine the value of an older piece of equipment. It may be necessary to rely on similar assets and how they have performed in the past as the basis of calculating the percentage.
The market approach is the primary method used for determining valuations of assets, machinery and equipment. This approach looks at recent transactions of machines that are similar to the subject asset being valued. It also takes into account the current offering prices of similar pieces of equipment. When comparable machinery and equipment are not available an experienced valuator will be able to determine, within a reasonable scale, an accurate value based on experience. This method is not typically used when the equipment is unique.
This approach is the most reliable of the three approaches when there is sufficient data available of similar machinery and equipment that has sold or is being offered for sale. Making sure the sources of the data are reliable is an important step in the process. The used equipment market consists of dealers, auctions, and public and private sales and is a reliable source for most of the data. Transactional databases are typically used for developing an opinion of machinery and equipment value. Some of the factors that are considered when comparing the subject machine to a comparable include: manufacturer, model, effective age, condition, capacity, price, time of sale, type of sale, location and accessories, among other characteristics. The comparable equipment will be adjusted to include the direct and indirect installation costs when calculating fair market value in either the continued use or replacement. Machinery and equipment valuations using the market approach have direct market data to support the conclusion of the person offering the valuation.
The income approach is one of the three methods that may be used to determine the value of assets, equipment and machinery. While it is usually the model used most frequently for business valuations, since an entire enterprise is being valued based on the income generated in the past and projected into the future, the income approach is not an approach that is typically selected by those valuing specific equipment and is not the optimum method by which to determine individual equipment value. The reason that it is not widely used in machinery valuation is because it is difficult to calculate the future benefit that a specific machine or piece of equipment will bring to an owner since there are myriad factors, including supporting assets, both tangible and intangible, possibly affecting the future income. Although some institutions require that the income approach be considered in every equipment valuation, it is often found that this approach is not as reliable as the sales comparison approach or the cost approach. Present value of a future income stream must be estimated, which is subjective. It is determined by discounting; the discount rate being calculated to take into account return on investment and risk.
Two methods are typically used to value machinery and equipment using the income approach, the Direct Capitalization Approach and the Discounted Cash Flow Method.
Direct Capitalization Method
The direct capitalization approach is a single period model. It capitalizes a projected cash flow into perpetuity and the capitalization rate that is calculated has no changes.
Discounted Cash Flow Method
The discounted cash flow method is a multiple period model. It is a calculated value on an invested capital basis and uses weighted average cost of capital to calculate a discount rate.