Equipment Appraisal Blog | Understanding Machinery Appraisals

When appraising machinery and equipment, an important but often misunderstood component is obsolescence. Beyond normal physical wear and tear, obsolescence reflects the loss in value from economic or functional factors that affect an asset’s ability to perform its intended purpose efficiently and effectively. Here are some thoughts to consider when factoring obsolescence into your valuation.

Physical depreciation or deterioration is considered the most straightforward type of loss in value due to age, usage, and maintenance practices. While not technically “obsolescence”, it is considered one of the forms; however, the focus here is on the more abstract types, which are more difficult to measure.

Functional Obsolescence (Internal)

Functional obsolescence occurs when equipment is less efficient or less capable compared to newer alternatives, even if it’s still operational. Technological advancements are common with machinery that is reliant on high production capacity or lower energy consumption, such as computer equipment and CNC machine tools. Appraisers can try to estimate functional obsolescence by comparing operating costs or production capacity to new makes and models of similar specifications.

Economic Obsolescence (External)

Loss in value may also arise from factors outside the equipment itself, such as changes in market conditions, regulatory shifts, or industry demand declines. The oil and gas industry, for example, undergoes significant economic cycles, during which reduced output and changing environmental regulations affect value. These issues reflect current supply and demand. Measuring this may involve analyzing broad market data, profitability trends, or industry utilization rates.

It can be challenging to estimate obsolescence in these forms, given that appraisers may lack access to pertinent data and have difficulty determining how to calculate these percentages from information that is available. One efficient way to measure this is to work through market comparables and develop a trend or depreciation table by asset type that reflects the average annual loss in value over its useful life, while tracking new equipment pricing.

Used equipment market levels reflect all forms of depreciation and will allow you to recognize how obsolescence is factored into resale value from a buyer and seller’s perspective. If sufficient comparable sales data is unavailable, you should consider conducting interviews with business owners, maintenance managers, and equipment resellers and gathering opinions based on their hands-on experience.

In summary, estimating obsolescence requires both analytical discipline and industry insight. Combining quantitative analysis with practical experience is a balanced way to account for loss in value over time. A commonsense approach to measuring this comes with experience, as you track and develop a useful database that you can continue to update as new appraisal engagements take place.

Artificial intelligence (AI) is rapidly influencing business practices. Equipment appraisers are beginning to explore AI-based tools for data analysis, market research, and report development. While AI offers several exciting advantages, it also raises valid concerns about accuracy, ethics, and professional judgment.

On the positive side of the discussion, if you have a database with access to AI data analysis tools, large volumes of market information can be processed in seconds, vs. hours or days. This can significantly improve efficiency when researching comparable sales or analyzing equipment trends across industries.

AI tools can help reduce human error and improve consistency in report formatting and calculations. Automated valuation models can provide checks against an appraiser’s conclusions, offering a useful validation tool.

AI can also aggregate market data from multiple online sources, including resale listings, auction platforms, and manufacturer databases. This provides a broader and more current view of market conditions than most appraisers could access manually.

These efficiencies can allow appraisers to reduce deliverable timelines for their clients without sacrificing report quality, as long as professional oversight remains in place.

On the flip side of the argument, there are several reasons to be cautious and even pessimistic about relying on AI tools. They can’t replace the experience and critical thinking of an educated, experienced equipment appraiser. Ultimately, value conclusions require human interpretation and professional reasoning.

AI tools are only as good as the data they rely on. Many online listings or resale sources contain inconsistent, incomplete, or misleading information. Without careful vetting, automated systems can base valuations on flawed or outdated material.

If appraisers lean too heavily on AI, they risk losing hands-on expertise with their analysis and report writing. The best appraisal work still depends on experience, training, and professional judgment. AI-generated analysis may not comply with USPAP or other professional standards, which require an appraiser’s personal work product, independence, and accountability. Using AI without proper oversight could jeopardize report credibility and certification.

In summary, AI should be viewed as a potential tool for qualified appraisers; however, it is important to be cautious with the level of reliance you place on it. When used responsibly, it can enhance research, improve productivity, and support data-driven decision-making. But an appraiser’s ultimate analysis and report deliverable must still rest on their independent judgment, supported by verifiable data with a clear understanding of the overall scope of work.