Equipment Appraisal Blog | Understanding Machinery Appraisals

Understanding Functional Obsolescence in Personal Property Assets

Posted by Equipment Appraisal Services on Mon, Nov 09, 2015 @ 03:30 PM

functional_obsolescence

How can a piece of equipment be called functionally obsolete is if it something that you use every day? Learn about functional obsolescence in the machinery and equipment appraisal market to make the right decisions about your existing equipment. 

Understanding Functional Obsolescence

A machine appraiser may very well understand what this term means, but the average individual does not. Luckily, the concept is a fairly simple one to understand, even if you are not an equipment appraiser. 

The idea of functional obsolescence originally comes from real estate, although it has spread to other markets like the equipment appraisals market. An item can be said to be functionally obsolete if it is less useful or desirable than it was before. Anyone who has ever upgraded their iPhone to the latest model should understand this concept. 

An item that is obsolete usually has an outdated design feature that cannot easily be changed. In real estate, an example might be a one-bathroom house, when neighboring homes all have 2 baths. For personal property such as a car or truck, an outdated feature might be an early generation personal navigation system that is not as robust as present models of dashboard navigation. 

When there are like items on the market that have newer features and are more desirable, demand for the old item wanes as demand for the item item increases. As more people buy the new item, the value of the old one will continue to decline. 

This has a range of implications for the property owner. A store owner could get stuck with lots of old inventory if he or she invested heavily in an item that has been replaced by a newer model. A landlord could be forced to make costly repairs to an apartment if tenants did not want to rent the unit due to old, less desirable features. Or the items could be sold for reduced profit, with the decreased equipment value cutting into the business's bottom line. 

How to Determine Functional Obsolescence

While you may suspect that something is becoming obsolete, only a machine appraisal can confirm this lowered value for you in terms of real dollars. During the machinery valuation process, an appraiser will review the piece of equipment, compare it to similar inventory, note its condition, and look at other market factors that may effect the equipment or machinery valuation.

Let's say an appraiser was looking at a bottling line that was supposed to bottle 2 units per second. If the unit could not be operated at its full capacity due to external factors, or if the unit required a tune-up and could not operate efficiently, it would not be used at its full capacity and would thus take on a degree of obsolescence. A tune-up may restore the unit to peak operating condition; however, when obsolescence becomes so large, it may be more cost effective to replace the unit than repair it. 

A machine appraiser can examine the equipment and determine the presence of obsolescence. Lowered equipment values could mean a greater tax deduction for the business. Alternately, a lower value could help the company decide to sell the equipment and invest in better technology or realize that a tune-up will save money over purchasing a replacement bottling line. 

Equipment appraisers who specialize in the niche you serve are best qualified to gauge obsolescence. When it comes to valuing the equipment you use every day, trust the experts at Equipment Appraisal Services. 

Tags: appraisal depreciation, functional obsolescence