Equipment Appraisal Blog | Understanding Machinery Appraisals

The next set of blog posts over the coming weeks will discuss the various elements of machinery and equipment appraisals and their potential influence on the overall valuation analysis. This week’s focus is on normal useful life.

Normal useful life is essentially the estimation of how long equipment will last from the time it is new until it needs replacement or a significant rebuild/refurbishment to extend its service. This is typically measured as a specific number, or within a range of years, such as 10 or 8-12 years.

Determining useful life can assist the appraiser when valuing equipment that is still in its initial usage life cycle and provides a broad perspective of the remaining (residual) value, as a percentage of its original or replacement cost. Appraisers can effectively develop depreciation value curves with useful life as a timeline framework while researching and implementing used market data to create points along the curve for estimating fair market and liquidation values, as well as end-of-life salvage value.

Normal useful life should be viewed as a broad-based component of the overall appraisal effort, which provides a reasonable sanity check to the market data and other cost approach variables that go into the analysis. For example, if you have estimated normal useful life at 10 years, and your other research shows that 5-year-old equipment is being marketed for 40-50% of new cost, which could reveal a consistent pattern from both of these perspectives. If, however, the market data for 5-year-old equipment is 60-70% of new pricing, then your useful life assessment may be too low.

Keep in mind normal useful life is merely a benchmark and represents a single life cycle. Appraisers will often see much older equipment available in the used marketplace that has been refurbished or rebuilt during its life which essentially extends or resets the life cycle for these aged assets. The concepts of “effective age” and remaining useful life, come into play when valuing these older machines. For example, a machine originally manufactured 20 years ago with a 10-year initial normal life may “effectively” be much younger and have a number of years of life remaining, given the refurbishment effort.

It's important to estimate normal useful life and remaining life for both newer and older vintage machinery and equipment as part of an appraiser’s overall analysis. Factoring in the market data and other cost approach factors you develop will create a well-researched and supportable valuation.

As a business, your investment in your equipment is a large part of your overall assets. Knowing how long that equipment will continue to operate is an important piece of information to help you plan your company's future expenditures. But the remaining useful life can be hard to determine. Fortunately, there's a way to get around the difficulty in determining this expected lifespan. Machine appraisers spend all day looking at and appraising equipment, so they not only have experience in how to calculate the estimated remaining lifespan but also know how to recognize signs that may extend or shorten machine lifespan. Here's a quick look at the overall process and what aspects may impact your equipment's estimated remaining life.

How does a machine appraiser determine remaining useful life?

Machines, like people, can age at different rates. Imagine a two-pack-a-day smoker with bad genetics who has done heavy construction and drinks a six pack every evening, before taking a ride down into some scary parts of town while never going to the doctor. If this individual made it past 50, it would be a miracle. The health guru with perfect genetics, a stress-free life and a love for fitness who regularly has health screenings may expect to live past the century mark at this point. Much like people who do or don't take care of themselves, machines can fail at different rates.

One area that can quickly impact machine lifespan is the environment in which it is used. Much like the smoker, a piece of equipment that is kept in a damp, dirty environment with extreme temperatures will tend to degrade much faster than one kept in a clean, dry environment with regulated temperatures. The bad genetics would represent the expected overall lifespan of a specific model of equipment, such as a model known for issues that will not last as long as similar models because of poor manufacturing, materials or mechanical problems. At the same time, the heavy construction background represents hard use of the machine. Equipment that has been used at the very top of its range of specifications, received hard use in a short period of time or otherwise abused will have a much shorter lifespan than may otherwise be expected.

When an equipment appraiser looks at a piece of machinery, there are a number of clues they can take into account. In addition to already knowing a rough range of estimated overall lifespan, the appraiser can look at the exterior for signs of abuse, including dents, bends or evidence of poorly-made repairs to determine any excessive use the equipment may have received. A look at internal components may reveal failing mechanisms that could cause a serious failure down the road. Checking out the environment may lead to details about whether a fresh coat of paint may stop corrosion or if the rust may cause a premature failure.

The process of estimating remaining useful life can be a daunting task, but with an equipment appraiser taking over the process, you'll quickly have the information you need for your business planning purposes. Be sure to check whether your equipment appraiser is certified, as the methodologies used by certified equipment appraisers have stood up to strong scrutiny in a wide range of situations. This means the remaining equipment lifespan they estimate for you is much more likely to be a good tool for your business planning needs.

When you own equipment, do you know about how long you can expect to be able to use it? Though most owners know roughly how long their equipment will last, determining a closer estimate is a difficult process. Fortunately, it's a process that is familiar to many experienced and certified equipment appraisers. Here's a quick look at the factors they consider when determining normal useful life in a piece of equipment.

Exactly how do you determine normal useful life in your equipment?

There are a wide range of factors that contribute to the lifespan of a piece of equipment. Here are just a few that are taken into account by a certified equipment appraiser during the process of calculating useful life.

• Environmental conditions. There can be a huge difference in the lifespan of a piece of equipment based solely on the conditions where it is stored and used. Equipment kept in a dusty warehouse with extremes of temperature and a leaking roof will almost certainly have a much shorter lifespan than one kept in a clean, dry workshop with climate controlled temperatures. Why? Moisture and humidity can lead to corrosion, while being used in hot, dusty conditions will lead to early breakdown of lubricants and cause excessive wear. Better conditions lead to a longer useful lifespan.
•  Suitability to the work. If the equipment you're using is underpowered for the work, it will be used at the high end of its range for most of its lifespan. That means it will overheat more often, breaking down lubricants and causing excessive wear on the components. This in turn leads to other parts failing and a shorter overall lifespan than may be expected of a piece of machinery better suited to the work at hand.
• Abusive usage. Is the equipment being used with care to preserve its condition? If it's being used incautiously or being beaten on to work controls, this level of abuse will quickly shorten its overall useful lifespan. As an example, we've all seen heavy equipment that has been bashed, dented and torqued early on in its lifespan, which quickly leads to early failure.
• Expected longevity of that line of machinery. Some brands have a reputation for excellence and longevity that comes into play. For example, a store brand bandsaw with a reputation for poor performance and shoddy manufacturing won't hold up nearly as long as a finely-crafted one that has been well engineered, created from the best materials and delivers superior performance time and again. When the second example is used, you can expect a much longer useful lifespan than you may otherwise anticipate.
• Regular maintenance and repairs. Though it seems like a simple step, regular maintenance in line with the manufacturer's recommendations can help ensure a much longer lifespan than equipment that has been neglected over the years. In the same vein, repairs that are caught early and dealt with quickly will help prevent damage to other components in the system.

Though the process of determining normal useful life in a piece of machinery is difficult, it's one that equipment appraisers are well versed in handling. By knowing when your equipment may fail, you can better plan for replacement and ensure you are still able to receive some resale value out of it. A certified equipment appraiser can help you determine this timeline for your machinery.

There are so many terms in the equipment appraisals process that you would need a dictionary to understand them all. As long as you know the key terms that could affect your machinery valuation, you can interpret the results of an equipment appraisal and buy or sell used equipment for a fair price. When it comes to buying and selling used equipment, one key term to understand is effective age. 

Understanding Effective Age 

Appearances can be deceiving. If you were buying a die-cut machine at auction, for example, you would want to know whether the machine was 2 years old or 20 years old. The age would affect the price you were willing to pay for the machinery. You might be prepared to purchase a die-cut sealer that was either 2 or 20 years old, but for a very different price tag. Likewise, if you were selling the machine you would have a different expectation of acceptable prices based on age. 

What if the die-cut sealer was actually 20 years old, but looked so good you would have sworn it was last year's model? This is where understanding effective age in the appraisal process comes into play. 

Every piece of equipment has a real age representing the time from the date of manufacture to the present. Effective age denotes the look and feel of the machine... in other words, how old it appears to be to observers. 

Whether you are buying or selling, effective age is important to know. It tells you something about the equipment values set at auction.

Effective age is subjective. Depending on how the machinery was cared for, the effective age can be less than or greater than the actual age. 

A machine that looks new but is years old could have been recently repaired and painted to appear close-to-new. When examining old equipment, consider whether the piece was cosmetically enhanced to look good or truly rehabilitated to be competitive with current models. 

Consider the example of a home for sale in your neighborhood that's 30 years old. Let's say the current owner remodeled the bathrooms with low-flow toilets and an energy-efficient shower, put in a new tile floor, and refreshed the paint. The updated bathroom looks brand new even though the home is 30 years old. Now, imagine the same home is on the market, but the bathroom has only been repainted and the sink faucet was replaced. The bathroom looks somewhat newer than the rest of the house, but isn't actually more efficient. The work was simply window dressing to trick the buyer into paying a good price. 

The same holds true for machinery valuation of used equipment. Rather than trust what you see, it's important to dig deeper and ask questions to find out if the equipment meets your needs and if the price is fair. 

An equipment appraiser can help you evaluate equipment you are considering buying from a third party or walk you through the equipment values and effective age of an item before you take it to auction. This can save you time and money if you're selling equipment. Why spend money to fix an item if its effective age will still look poor compared with similar pieces of equipment? 

 Whether you seek equipment appraisals before buying or selling, it's key to find an appraiser who understands the industry, equipment, and core considerations.

If you're reading through a machinery valuation before bidding on a piece of used equipment at auction, you'll run across the concept of remaining useful life. By understanding remaining useful life, you can understand how much the equipment values are and purchase with confidence. Learn more. 

What is Remaining Useful Life in Equipment Appraisals?

Remaining useful life, sometimes abbreviated as RUL, refers to the amount of time in years a piece of equipment has before it will need replacement. 

To gauge the remaining useful life of an item, the appraiser will review service records, thoroughly inspect the equipment, and check out the environment where the equipment is used. A forklift that's kept in a salvage yard will age much faster than one that's always stored in a garage overnight, for example. Even if two forklifts were purchased at the same time, their remaining useful lives can widely differ. 

An equipment appraiser will consult guides that indicate equipment values over time, as well as the normal useful life of the unit, which is the typical life span of the unit. He or she may reach out to the manufacturer with questions that can help define a value if any questions arise. 

By subtracting the estimated period of use from the normal useful life, the equipment appraiser can deliver an estimate for the remaining useful life. For example, say that a canner has a normal useful life of 25 years, and the appraiser determines the equipment appears to have been used for 10 years. The canner may be older or younger than 10 years; what matters less is the physical age than the amount of use the equipment shows. The appraiser would then subtract the use from the normal useful life to arrive at an RUL of 15 years. 

How Understanding Remaining Useful Life Benefits You 

If you are interested in a piece of equipment such as a canning machine, used equipment auctions can be a great way to purchase the equipment you need at a price you can afford. Yet if you don't understand the useful life, you risk paying more than you should for an old canner that won't truly last. 

If you are the other party in the auction -- the owner of the canning machine who wants to sell it -- you also must understand the concept of useful life. By getting the equipment values taken ahead of time, you can gauge the fair market value of your item and decide your next steps. You might opt to have the old canner serviced, if a servicing can help you command a better price at auction. Or you might decide against servicing equipment, saving yourself money.  

Whether you want to buy or sell a machine, remaining useful life is an important concept to understand. A skilled equipment appraiser will know how to accurately determine the RUL and can explain it to you so you understand the estimate and can make the right decision for your business interests. While the RUL is always an estimate, not a guarantee, it's helpful to have a baseline estimate for a machine's lifespan. 

Once you know the remaining useful life of a piece of equipment you've just purchased, you can plan ahead for when the item might need to be replaced. This helps you budget accordingly for the replacement and avoid the unpleasant shock that comes with suddenly losing a piece of equipment you rely on every day.