Equipment Appraisal Blog | Understanding Machinery Appraisals

Asset Appraisals - Difference Between Reproduction and Replacement Cost New

Posted by Equipment Appraisal Services on Mon, Sep 21, 2015 @ 10:00 AM

A logical starting point for determining the value of a piece of used machinery or equipment would be to find out what it would cost to replace it with a new piece of machinery or equipment that essentially has the same function and capacity. A machinery or equipment appraiser would then adjust the replacement cost new by deducting for such things as physical deterioration, financial obsolescence, and economic obsolescence. Calculating and deducting those costs from the replacement cost new will give you a good estimate of the value of used machinery and equipment.

When the decision is made to replace equipment, either out of need or desire, a business owner would naturally seek to find the lowest cost of replacement. Does it make more sense to buy a new piece of equipment or is it more cost effective to reproduce a replica that is almost identical to the equipment being replaced?

Defining Replacement and Reproduction Cost New

Replacement is the current cost to buy a similar piece of equipment that has the same utility as the equipment being appraised. The new equipment does not have to be the exact same model, but it should perform the same essential functions as the equipment being replaced.

Reproduction new is the current cost of reproducing a new replica of the equipment while using the same or very similar materials. Reproducing an exact replica is often more expensive than replacing equipment.

Building it One Piece at a Time

Equipment appraisals help determine equipment values and they may provide the information a business owner needs to decide whether or not to try to reproduce the equipment in question. If the cost of producing an almost exact replica of the appraised equipment is higher than the cost to replace it with something new that is similar or better, the choice would be fairly obvious.

After a machinery and equipment appraisal is done,  a very low fair market value may be assigned. The machinery appraiser may tell you that due to the age of the machinery, no replacement parts are available. It would be prohibitively expensive to forge new parts and assemble a new machine from scratch, but you could still do it. 

In one of his many hits, Johnny Cash described how he built his own special Cadillac out of all different parts he managed to sneak out of the GM assembly plant. He built it One Piece at a Time, illustrates the difference between replacement and reproduction new costs. Replicating the Cadillac described in the song today might cost a million dollars, and even though new Cadillacs are pricey, buying a new one to replace the old one would make a whole lot more economic sense. 

Why Appraisers Use Replacement or Reproduction Cost New  

When appraisers can easily gather the replacement cost new of an asset, this value is used when begining the cost approach. This takes additional time and research to find out how much an asset is selling for today.  In some cases either due to uniqueness, age of a piece of equipment, or due to the level of research requested for the appraisal, the reproduction cost can be used as well.  The reproduction cost new is developed by taking the original cost of the asset and bring it to today's dollars by using such trends as the Producer Price Index (PPI) that is published by the Bureau of Labor Statistics.

Your Situtaion Will Dictate What is Needed

Equipment appraisers can estimate the current equipment cost new of equipment as well as the current value of equipment. Using an insurance loss as an example, a policy may reimburse a business owner for the replacement cost or the actual cash value of an asset.  Where replacement cost would result in the equipment being purchase brand new to replace the old one, the actual cash value would look at it in the current condition and age as of the loss.  This is the equivalent of the fair market value.

Tags: replacement cost new, reproduction cost new