Equipment Appraisal Blog | Understanding Machinery Appraisals

How is residual value for equipment leasing estimated?

Posted by Equipment Appraisal Services on Mon, Apr 06, 2020 @ 08:00 AM

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When you have new equipment that you're trying to finance or will lease out to other companies as part of your business, how much is it actually worth? A residual value analysis-M & E provides you with a range of important information about your new equipment, making it easier to prove value for a wide range of circumstances. When you have an accredited equipment appraiser estimate your equipment's value, you've got solid documentation for financial transactions and courtroom battles. Here's a quick look at how residual value is estimated.

How is residual value for equipment leasing estimated?

To start, let's take a look at what residual value actually means. Residual value simply means the estimated future value of the asset from a Fair Market or Liquidation perspective. Based on the appraiser's experience and their understanding of how residual value is established in the equipment leasing industry, the value can be estimated based on a wide range of outside factors. These include:

  • Current Listings: How much is the equipment being listed for resale for across the local, regional and national markets? How expensive would it be to ship to the other side of the country where the market is booming?
  • Data Based on Prior Sales: How much has the equipment been selling for over the past few days, weeks or months? Equipment listed at auction often doesn't reflect a final price until the auction has finished and the sale has taken place.
  • Understanding Typical Market Depreciation Levels: How much should you expect the value of the equipment to decline over time? A well-trained appraiser understands the rate of depreciation for a wide range of equipment, providing them with the tools they need to estimate an accurate value.
  • Size of the Resale Market: How much demand is there for the equipment that's being valued? If there's a lot of demand, you may be able to receive a higher offer for the sale of the equipment or higher reimbursement for its loss because it will be more costly to replace than usual.
  • Current Economic Conditions: When the economy is strong, people are more likely to pay an initial asking price rather than negotiate, while poor economic conditions may limit your available buyers, lowering the amount you can sell the machinery for.
  • Status of the Industry: Is your industry growing? If so, the demand and expected price of the equipment may also rise. If your industry is doing poorly, the demand and expected price may fall.

All these factors have a place in determining an estimated residual value for the equipment. The appraiser will also take into account the specific machinery, emerging technological trends that may increase or decrease the market and similar aspects when determining the equipment's estimated residual value. 

By having a residual value analysis-M & E performed on your business' machinery assets, you can ensure that you're able to leverage those assets to your benefit for a wide range of situations. However, the estimate of value you receive on your equipment is only as good as the appraiser who is completing the process. Make sure that you work with an accredited equipment appraiser to ensure that your estimated value is accurate and properly determined, allowing it to stand up in a wide range of real-world circumstances.

Tags: Residual Value Analysis for Machinery & Equipment