When equipment appraisers look at equipment during a machinery valuation, one of the characteristics they take into account is the estimated remaining useful life for that piece of machinery. Though the the process may look easy, a machine appraiser looks at several different factors when determining the remaining useful life when determining equipment values.
The Accountant's Way of Determining Remaining Effective Life
When it comes to equipment value, accountants tend to look at value in terms of depreciation. Tax systems are based around a uniform reduction in value, referred to as depreciation. An accountant's way using straight-line depreciation starts with the historical price at which the equipment was purchased, then takes away a certain amount of value every year for a set number of years. But just because a piece of machinery is fully depreciated doesn't mean that it no longer has any value or that it has reached the end of its effective lifespan.
Why Equipment Appraisals Provide a More Accurate Estimate of Remaining Useful Life
An equipment appraisal look at much more than just the age of the machinery when its determining the remaining effective life. It takes into consideration the condition of the equipment and whether it appears to have been abused or It whether necessary maintenance and repairs have been made, because if they haven't, that can cause additional wear and tear on other parts of the machine. It also considers the conditions the machinery is typically operated in. A piece of metalworking equipment will last much longer if it is kept in a climate-controlled workshop than if it's on a site where it's exposed to the elements near the corrosive saltwater ocean.
How Remaining Useful Life is Determined in Equipment Appraisal
There are common methods a machinery appraiser will use to calculate the remaining useful life in equipment. The appraiser often will use published documentation that show the normal useful life range of types of equipment. An appraiser may also talk to the manufacturer or companies that produce similar type assets to estimate the normal useful life. The normal useful life of the equipment minus the effective of of the equipment equals the remaining useful life.
Determining remaining effective life in equipment valuation helps you estimate an expected time frame for machinery replacement in your business. A completely new appraisal can be performed if you've buy a business and you're concerned about how long you'll have before the machinery needs to be replaced or need to document this information for your financial institution. It is also important to have an appraisal to set the books to start the depreciation schedule.
Though it's not an absolute guarantee of how long each piece of equipment will last, it does help you plan financially as a business owner for major equipment replacement costs down the road. If you need to have a machine appraisal performed to help determine your equipment's estimated remaining effective life, please contact us today. Our highly-qualified, certified valuation specialists are always happy to help.