Equipment Appraisal Blog | Understanding Machinery Appraisals

At the lowest end of the machinery and equipment valuation spectrum are two concepts tied together by the mere fact that they estimate value at the end of an asset’s life: Salvage Value and Scrap Value. You might think they mean basically the same thing, however, there are distinct differences between them which are important to understand.

When a piece of equipment reaches the end of its useful life, the owner has options with which to determine the disposition of the machine. Does it make sense to reinvest capital to replace major components and refurbish the asset or is the additional money needed too high in comparison to replacing it with a newer one? If the decision is to purchase new and retire the older model unit, then the discussion of salvage and scrap value comes into play.

Assuming there remain a number of useful parts or components that can be resold with the machine or removed and sold separately, then salvage value can be estimated by reviewing what remains and adding it all up. If the machine is beyond this stage, where excessive usage over time has left nothing to salvage but the weight of the metal, rubber, and plastic, then scrap value is the only viable option.

In both instances, you can consider researching local recycling and salvage facilities that will assess the condition and offer a price to purchase the machine in its entirety. As an alternative, you can complete the assessment with the help of a professional appraiser and remarket the assets directly to brokers and third parties who may have a need to stock up on spare parts. Yet another option is to keep the machine on hand and strip the parts off when you need them for other working equipment in your fleet.

Whichever option you choose, it might be a good idea to obtain an overall independent condition assessment from a qualified mechanic or utilize the experience of your in-house maintenance manager to estimate this. Equipment appraisers can assist as well, based on their knowledge of typical salvage and scrap values for many different types of machinery.

From an appraiser’s perspective, developing estimates of salvage value at end-of-life is a common practice when developing annual depreciated value estimates for new equipment. This analysis is also performed by finance and leasing companies with experienced asset management teams as part of their organization.

In summary, understanding asset value at the latter stages of an asset’s life is just as important as in its early days when the machinery is in full operation. You can discuss any of these topics in more detail with an accredited machinery appraiser who is able to assist in the process.

As an accredited or certified machinery and equipment appraiser, you will learn that three approaches to value are considered for every appraisal: The Sales Comparison, Cost, and Income Approaches. Except in rare cases, only the first two are utilized in a typical valuation as business revenue and expenses under an income approach are very difficult and impractical to apply directly to equipment as part of a larger operating facility. Here are a few broad discussion points regarding these two primary approaches.

The Sales Comparison Approach, which is commonly referred to as the “market” approach, focuses on the research and analysis of similar used machinery being bought and sold in the resale marketplace. The appraiser reviews available listings, sales, and databases, while gathering opinions of value from dealers and other resellers, and ultimately adjusts the data to reflect a reasonable opinion of value based on the specific characteristics of the assets being appraised.

The Cost Approach relies on the determination of key variables that pertain to estimating equipment value, including replacement cost new, useful life, effective age, and annual levels of depreciation. Understanding how these factors work in conjunction with each other, as well as providing additional perspective to complement the sales comparison approach, will create a balanced opinion of value.

Both approaches should be considered and relied upon to a certain extent in every equipment appraisal to avoid a limited perspective. The amount of data the appraiser can develop under each approach will determine the level of weight assigned to each. In some cases, the equipment may have a limited amount of used market data and need stronger reliance on a cost approach and vice versa.

It is important to understand where the most reliable sources of data are found under each approach and how to reasonably interpret them. The valuation professional should look to specific market and industry sources that directly relate to the subject assets being valued. The appraiser should also avoid taking every source at 100% face value while creating a “common sense” approach that brings the information together to form a realistic opinion of value.

Keep in mind the conclusions you ultimately estimate are your opinion, and not anyone else’s. You will cite all the sources you relied upon; however, they are individually only one component of the overall appraisal that you develop. The more experience you gain over time will bring these processes into better focus as you continue to understand the nuances of machinery and equipment valuation.