Equipment Appraisal Blog | Understanding Machinery Appraisals

The concept of the principle of substitution comes up any time that machinery and equipment appraisal is discussed. It is important that you understand what this concept means if you are seeking equipment appraisers for a machinery valuation. Learn what is the principle of substitution and what it means for both buyers and sellers of machinery and equipment. 

What is the principle of substitution?

In equipment value terms, the principle of substitution means that a party will not pay more for the piece of equipment in question than the cost they would pay for an equivalent piece of equipment with the same purpose.

For example, consider a tractor that is 10 years old and has an asking price of $5,000. If you can purchase a comparable tractor that is also 10 years old, yet costs just $4,000, why would you pay the extra $1,000 for the first tractor? Under the principle of substitution, the maximum acceptable buyer's out of pocket cost for the tractor would thus be $4,000. 

The principle of substitution is also affected by market demand. If hundreds of used tractors become available near you, sellers will have to lower their prices to attract buyers. If used tractors are scarce, sellers can raise prices above the equipment value if there is demand from buyers for the piece of machinery. 

The principle of substitution is a fundamental basis of the cost approach to machinery valuation. In the cost approach, an equipment appraiser usually determines the replacement cost of a new item (i.e., a new tractor) and then factors in lost value from age, wear and tear, and other variables to arrive at the equipment value in real terms. 

Why the principle of substitution matters in a machinery valuation

If you are in the market for a new piece of equipment, it is only natural that you would want the highest value for your budget, whether buying a used tractor or a new piece of factory machinery. Knowing the cost value of a piece of machinery can help you determine whether it is a good use of your funds. 

Even after the sale, the principle of substitution can be used to help insure the piece of equipment. Were your asset to be stolen or damaged, an insurer would not pay you more to replace the item than it was worth. Insurance agents will thus use the principle of substitution to calculate the amount to which you would be entitled in case of loss. In some cases, an insurer might send a machine appraiser to estimate your equipment's value before issuing an insurance policy. 

Likewise, businesses often need the appraised equipment values for tax purposes. Investing in something as important as a tractor is certainly a business write-off; to claim that it is worth the stated amount, you may need an equipment appraisal that is accurate and irrefutable in case of audit. 

Whether you are buying a piece of equipment or selling one, knowing the equipment value ahead of time can help you determine a fair price for the item. This can help equipment buyers move forward with the deal with confidence and assist sellers in pricing the item fairly enough to move it quickly. Equipment Appraisal Services offers machinery and equipment appraisals nationwide. Get peace of mind before you buy or sell your next asset by seeking an independent machinery valuation from our certified appraisers.

One of the key concepts used in equipment appraisal is that of standards of value. Though that term is often bandied about, what does it actually mean? In this piece, we'll investigate what standards of value are, how it affects your equipment's value and what types of standard is used based on your end goals.

How standards of value affect your equipment appraisal

What are standards of value?

Standards of value is a term that can be somewhat confusing, as it refers to two different concepts. One is the machinery valuation in a particular currency or medium of exchange, which can be of vital importance on the international market. But it can also refer to the type of valuation that is performed by a qualified equipment appraiser on your machinery. For the purposes of this article, we'll discuss the second standards of value referring to the value of a piece of business equipment that needs to be appraised and how the different values can affect your bottom line. Depending on your end purpose for the equipment in question, you may need a significantly different valuation method used, so it's of vital importance that you discuss your intentions with the equipment appraiser before the machine appraisal process is started.

How do different standards affect your equipment appraisal value?

Businesses have many different reasons for having an equipment appraisal performed for their company. They may be trying to determine when it becomes more cost-effective to sell off older machinery that is no longer keeping up with demand. They could be determining the salvage value on older equipment to determine whether it makes better economical sense to continue repairing older equipment or to replace it, and how much the salvage of the older equipment may offset the cost of the replacement equipment. They may need to know the replacement value in case of a fire or other disaster for insurance purposes. 

What standard is best for your purposes?

Unless you're considering a forced asset sale due to financial difficulties, most standards of value are used for a few specific purposes. The first is to get a more accurate financial picture for the business by updating the actual value of equipment that has been completely depreciated, whether it's because you're considering a merger, buy out,  sale of the business or other ownership change. The second is to prove the value of machinery in case of a loss, so that insurance claims can be filed in a timely manner, ensuring your company is able to recover from the los and continue operations effectively and with minimal down time. The third scenario involves expanding or reinventing the business' direction, with the appraised equipment standing as collateral for a potential financial loan to make the expansion or change more feasible. Of course, any of these types of standards will also provide you with a better view of your business' financial health, making it much easier to make smart investment decisions.

By keeping these different standards in mind, you can have a machine appraisal completed that is in line with where your intentions lay. At Equipment Appraisal Services, our valuation specialists are certified through the American Society of Appraiser's Machinery & Technical Specialties designation, so they deal only with heavy equipment on a regular basis. This helps our appraisers give you the most accurate equipment appraisals in the industry. Please contact us today to discover exactly what your equipment values are and to get a better picture of your business' bottom line.

Though the current price at the pumps may have most Americans smiling, those in the petroleum business know just how difficult a downturn in this volatile market can be to their business. From keeping the crew happy to making fast decisions on whether a possibility is a go or a no-go, the fast changes in this market is enough to make anyone a little stressed. In this post, we'll take a good look at how you can protect your company against volatile changes in the market  and position yourself for the next boom by making wise business decisions based on a proper oilfield equipment appraisal.

Protect your interests with an oilfield equipment appraisal

Know your bottom line

By knowing exactly what your equipment values are, you're able to know exactly where you sit in terms of assets. A qualified equipment appraiser can include an estimated remaining useable life as part of your machine appraisal, giving you a good heads-up on when you can expect to replace aging equipment. They can also point out areas where you may want to start the replacement process, by leaving long-term machine equity until the last for replacement, ensuring you'll get more from your machinery in the used equipment market.

Have a solid grasp of your business' actual worth

Equipment appraisals provide you with a better idea of what your equipment is actually worth, rather than the depreciated value counted on your taxes. During a market upswing, the cost of a particular piece of equipment can rapidly increase, which a qualified appraisal specialist takes into account when providing you with a quality oilfield equipment appraisal. Because you know exactly where your assets stand, you know exactly where you stand to make better business decisions. Even better, a quality machine appraisal is prepared to a specific set of standards, which makes it easier to secure financing using your machinery as collateral, because the bank knows it can trust the machine appraisal as part of an accurate picture of your business' net worth.

Avoid risky propositions

When the guy on the next rig comes along to tell you he's quitting and ask if you're interested in buying him out, do you know whether it's a good idea or not? A machinery valuation is a great way to determine your bottom line, so you know whether you're in a good or bad financial position to take advantage of these situations as they arise. Depending on how your books are set up, you may have a financial picture that is either too optimistic that puts you in danger of losing your business to a bad investment or is too conservative, keeping you from taking advantage of new business and business expansion opportunities when they arise.  Knowing your financial state helps you make intelligent business decisions.

The oil & gas industry is volatile, but your business doesn't need to be. Instead of risking everything on a gut feeling gamble, why not look at having a quality equipment appraisal performed on your oilfield machinery? Position yourself to take advantage of the next upturn and you'll be ready to go while your competitors are still catching up with the market change. By using an ASA-certified appraiser who has received the standards board's Machinery & Technical Specialties, you're ensuring that you'll get a professional machinery valuation that will meet your needs. Contact us today for more details on getting started on the path to making wise and informed business decisions.

When it comes to office equipment, most office workers will tell you that it has three phases: working, not working and kind of working. But the truth of the matter is that knowing the office equipment values can help you decide when it's time to retire older equipment in favor of newer models, because it's easier to tell how the equipment impacts your company's assets and equity. Here are some things to consider when looking at an office equipment appraisal:

Office Equipment Appraisal and Your Equity

• One method many business owners use to determine if it's time to get new equipment is the point where the cost for repairs needed to keep the older machinery operational exceeds the cost to pay for new equipment. Unfortunately, by this point your business will have lost most of the equity in the equipment because if you're not willing to pay for additional repairs, people purchasing the equipment will not be willing to pay a pay the additional costs either.
• The first area to consider when your business is considering keeping and repairing old equipment versus purchasing new equipment is what the equipment value is right now. Having a quality machinery and equipment appraisal performed helps you determine the starting point in your decision-making process and helps you support your decision with a standardized logical methodology.
• Once your equipment appraiser provides you with a solid machinery valuation, the next thing to consider is how much longer you can expect the equipment to run reasonably and whether the loss of equity from depreciation over the remaining life is worth waiting to replace the equipment. An office equipment appraisal can also include an estimated remaining useful life calculation, which should help in this situation.
• On the opposite side of that argument, consider whether you're replacing the equipment too quickly and are costing yourself working capital. As an example, if you purchase a new car and drive it off the lot, it immediately loses value. Purchasing a new piece of equipment just to sell it a few months down the road can quickly deplete your equity. You'll want to wait until you can get you money's worth out of selling the used equipment if at all possible.
• Another option is to consider what you can get out of your existing office equipment. If the machine appraiser comes up with a value that makes it worth replacing the machine, that means part of your office upgrades are paid for from the sale of the older equipment. This can help make a great selling point for an upgrade when budgets are being strictly controlled and monitored.
• An additional consideration to bear in mind is whether the new equipment will have features that are not available on the existing equipment that will make your business more productive or will help it keep up with the competition.

By knowing your office machine appraisal value, you're getting a much better idea of where you stand in terms of office performance, continuing costs and equity in assets. Because office machinery is so vital to your business' productivity and continued success, having quality equipment appraisals performed helps you make smart business decisions. If you need to have your office equipment appraised by one of our highly-trained, certified equipment appraisers, please contact us today. At Equipment Appraisal Services, we're always happy to help your business be everything it possibly can be.

What are your company's equipment values? Though you could guess, a machinery and equipment appraisal can give you a better idea of the value of your company's machinery. But beyond making a quick guess based on what you've seen sell lately or where it is compared to new models of older machinery, the only way to make sure by having a quality machine appraisal performed, during which time the effective age of the machinery will come strongly into play. Let's take a look at what equipment appraisers concentrate on when determining equipment value.

Effective Age of an Asset in Machinery Valuation

Though you can try to determine the value of a piece of machinery, there are a few techniques that don't really work well. Using standardized depreciation formats instead of considering the long-term viability of the equipment means you may have completely depreciated the assets you are still using on a regular basis, which provides an inaccurate view of your business' financial outlook. At the same time, basing the value on local sale prices or dealership offerings may also wreak havoc on your financial outlook, as other machines being offered for sale may be of higher or lower quality and maintenance than the machinery you own and need to appraise.

When an equipment appraiser looks at your business' equipment, he or she is not just looking at the age, manufacturer and model. Because machinery can be kept in a wide range of conditions and levels of maintenance and repair, a much closer approach must be undertaken to determine what the effective age of a machine is as well as the expected remaining useful life from that machinery. But what kind of details are considered during equipment appraisals? Let's continue on for a look.

How Machinery Valuation Specialists Determine Effective Life

So how do machinery appraisers determine the effective useful life of your equipment? They take a good look at the machinery, to see whether it has had excessive wear and tear or other signs of abuse, such as dents, welded repairs or similar concerns. Other areas they'll consider is the working environment and how well the machine has been protected from the elements. They'll take a look at your maintenance and repair logs to ensure that the equipment has received proper care or whether there are outstanding issues that could lead to further problems down the road. They'll consider the hours meter and whether the degree of wear matches up to what they'd expect from machinery with that amount of use. Beyond the machines you own and hare having appraised, they'll also take into consideration similar machines they've appraised in the area and how long they tend to last, basing your machine's potential effective life on all these factors.

By knowing your company's equipment appraisals are accurate and based on solid methodology, you're able to make better decisions in the future that will benefit your company, such as determining when to plan for expected machinery changes as older assets reach end of life. By having a quality, certified machine appraiser take a good look at your machinery and determining its effective age and potential future lifespan, you have legal documentation of the condition of your machinery for financial or insurance purposes if needed. If you have any further questions on how effective life is determined or want to schedule an equipment appraisal, please contact us today. Our highly-trained, certified staff are always happy to help with your equipment appraisal needs.