Equipment Appraisal Blog | Understanding Machinery Appraisals

What is effective age and why does it matter for your business?

Posted by Equipment Appraisal Services on Tue, Jan 16, 2018 @ 10:56 AM

effective age.jpg

Effective age is defined as the difference between the overall economic life and the remaining economic life of a piece of equipment, a structure or similar asset. Though that provides you with a basic overview of the concept, it can often seem much more complicated than that. How is it determined? How will it impact your company's bottom line? Do you really need to know this detail for your machinery? Here's a quick look at those questions and more.

What is effective age and why does it matter for your business?

Though the above definition of effective age seems rather dry, it does cover the basics. Imagine that you've purchased a cargo van for your company. Purchased new, the expected lifespan is about five years with your expected annual mileage. But what if you found a great deal on another vehicle after a couple years of ownership? By spreading the work between the two vehicles, you may then expect the cargo van to last longer, but exactly how long? That's where effective age comes into play.

If machinery is abused or used in a harsh environment, it may age at a rate faster than would otherwise be considered normal. Salt water, moisture, humidity, sand, grit, dirt, acids: all of these factors can make a piece of machinery age at a much faster rate than would normally be expected, often because they cause excessive wear and tear on the machine's components. If you were considering using machinery like this as collateral in a bank loan, you may find it isn't considered to be worth as much as you might expect.

In both of these cases, the machine itself can be expected to last a longer or shorter time period than may have been originally expected based on the appraiser's prior knowledge of the equipment. Because a machine appraiser spends all day looking at equipment, they have a good eye for when a machine is in exceptional condition and will last significantly longer than expected. For example, a well-maintained piece of equipment that is kept in an ideal environment and worked well below its top specifications can be expected to last much longer than a piece of machinery that is poorly maintained in a bad environment and regularly worked at the very top of its expected performance will. 

When you have a machinery appraisal performed on your equipment, you're able to discover about how much longer it can be expected to perform economically for your company. Having this information available makes it much easier to determine when you'll need to purchase replacement equipment. You'll have more time to shop around, learn about the best new features and decide exactly what type of machinery you need and what budget you can afford to spend on the right equipment. That's always a much better option than being forced to quickly replace failing equipment with machinery that won't meet your needs.

By knowing your machinery's effective age, you can better plan for your company's financial needs in the future. This allows you to spread any equipment purchases out over time without having to worry about your equipment failing before it's paid off. By knowing this figure, you can ensure that your company has the means in line to replace the equipment when the time comes without exposing the business to excessive risk.

Tags: Asset Depreciation, effective age

How Incorrect Depreciation of Equipment can Affect Your Bottom Line

Posted by Equipment Appraisal Services on Tue, Apr 05, 2016 @ 10:30 PM

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As tax season is in full swing, there are two ways to handle depreciation of equipment: the easy, risky way or the harder, smart way. Though it's easy to use the government's standard depreciation tables and schedules to depreciate your equipment values over the years, you may actually be creating a situation where you're opening your business up to risk or leaving money on the table when looking at potential opportunities. Depreciation is legal documentation of your business assets and should be accorded the same regard as your deed to your location or your business licenses. Here's why using machine appraisal to get a proper figure for depreciation of equipment can make a huge difference to your company:

How miscalculating depreciation of equipment affects your company's potential

Situations where value remains higher than the standard depreciated value

In some situations, an equipment appraiser may assign a higher value than a standardized depreciation table. If you use a depreciation table in these circumstances, you're stating a lower value than the machine may actually be worth. This is a problem in a few areas. A tax agency may claim that you are intentionally claiming a lower value to avoid taxes, especially if you use the equipment for an extended period of time after it has been fully depreciated per the standardized table. You can't leverage your assets fully to take advantage of opportunities that may come your way because your financial institution doesn't know you have more value in your machinery than stated. Not having an accurate machinery valuation may cause problems with getting cash from your insurance company to purchase comparable equipment in a loss because the tax record and depreciation is the only proof of value you have.

  • Is your equipment seeing easy use? If it isn't getting normal wear and tear, it might have a higher value than an average piece of equipment of that type and quality because it will be expected to last longer.
  • Did you invest in quality equipment that is still expected to be in service and retain value beyond the end date of the standard depreciation table for that type of equipment? If so, it might lose value at a slower rate and will still have value long after it has been completely depreciated.

Situations where value may be lower than the standard depreciated value

But there are also situations where your value may be below the standardized depreciation tables. In these instances, you may be overstating the value of the equipment, leaving your business open to risk and higher taxes. Paying taxes on assets that are shown as having a higher value creates a false high value, raising your business taxes. At the same time, using these figures to secure financing may open your business to additional risk when an opportunity doesn't pan out and the machinery won't sell for its depreciated rate.

  • Does your equipment tend to see heavy or abusive use? If it does, it might have a lower value than an average piece of equipment of that type and quality due to a shorter expected lifespan.
  • Is it of average or bargain quality? It may not last the full length of the depreciation table, forcing you to pay higher taxes on it until it fails.
  • Have there been issues with irregular maintenance or uncompleted repairs? These can lead to a shorter lifespan, causing it to be removed from service before it's completely depreciated.

If you need to have equipment appraisals performed to get a corrected depreciation value, Equipment Appraisal Services can help. Our certified, highly-trained equipment appraisers are ready to find the right value for your machinery.

Tags: Asset Depreciation, machinery & equipment appraisal

Effective Age of an Asset in Machinery Valuation

Posted by Equipment Appraisal Services on Tue, Jan 05, 2016 @ 09:30 AM

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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.

Tags: Asset Depreciation, normal useful life, effective age, remaining useful life

What does economic obsolescence mean?

Posted by Equipment Appraisal Services on Thu, Oct 22, 2015 @ 08:30 AM

economic_obsolescence

You may have a piece of equipment that is in good working order, yet be shocked to hear that a machine appraiser tells you the equipment is obsolete in economic terms. To understand and act upon a machinery appraisal, you must have working knowledge of the concept of economic obsolescence. Let us explain it for you. 

What is Economic Obsolescence? 

The American Society of Appraisers notesthat economic obsolescence is a difficult factor to explain. It refers to a situation where a piece of equipment loses either its usefulness or its value for factors unrelated to the object itself. 

For example, a typewriter was highly useful until computers came along. The typewriter became obsolete once computers displaced typewriters in the majority of offices.

Odds are, if you are a niche retailer, you have specialized equipment in your business that is or will become obsolete. 

A machinery valuation can help you determine whether to repair or replace outmoded equipment, help you conserve business profits, and show you where you should invest additional capital.  

An appraiser performing a machinery valuation will examine the item, determine whether economic obsolescence is occurring, and identify the factor or factors that are causing it. Finally, an appraiser will provide research materials to support their appraisal and go through the results of the valuation with you. 

You will have a good understanding of your equipment value at the end of the process. As a result, you can make informed decisions about business growth.

Factors Affecting Economic Obsolescence

An equipment appraiser will review a broad range of factors when appraising a piece of machinery. During the equipment appraisal, the appraiser may notice one or more factors that could suggest obsolescence. These include: 

  • Increased cost in materials and supplies related to usage of the equipment
  • Reduced demand for products made utilizing the machinery
  • Changing governmental or environmental regulations that affect the use of the equipment
  • Over supply of product in the marketplace 

Any these factors reduce the profitability of the product and viability of the equipment. When the equipment is no longer cost effective, or the market does not require the products made with the equipment, it can become obsolete. 

If there is a better opportunity to invest staff time or money, the conditions may be right for economic obsolescence. 

While appraisers agree on the circumstances that might suggest obsolescence, they disagree on when the condition is actually present. The concept is highly subjective, so one appraiser may see decreased demand as a blip in the market while another may perceive it as the new reality going forward.  Machine appraisers can use several methods to quantify the degrees of obsolescence, including gross margin analysis, inutility, supply and demand analysis, industry return on capital or equity, market-derived approach, and income or earnings shortfall examination. 

The subjective nature of the concept can make it difficult for business owners to accept a machinery valuation or take the appraiser's word that equipment may in fact be obsolete. 

Before winging it, take the time to talk with the appraiser and make sure they have the necessary knowledge. When you select a professional who knows your business model, you will feel more comfortable with their judgment and all equipment valuations.

Tags: Asset Depreciation, economic obsolescence, American Society of Appraisers

What is the Normal Useful Life of an Asset?

Posted by Equipment Appraisal Services on Mon, Oct 19, 2015 @ 03:00 PM

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If you are selling your business, financing or refinancing, or auctioning old equipment, you may need the services of a machinery appraiser to determine the value of your business assets. During an equipment appraisal, a skilled appraiser will use a variety of factors to determine fair equipment values. One factor typically considered is the asset's normal useful life. Learn what it means to get the most insight into your machine appraisal and business valuation

What is Normal Useful Life?

The useful life concept originates in accounting, where accountants used a formula to determine the relative useful life of an asset for business and tax purposes. Appraisers have developed their own handbook by category. This gives appraisers a common ground to use when evaluating enterprise assets. 

The normal useful life refers to the physical life (in terms of years) that a piece of equipment will be used before it is retired from business. The normal useful life is typically a conservative measure that accounts for the useful life of the item before you might elect to retire it from business. 

A useful life of a tablet might be 24 months. Even though the tablet still works after 24 months, a reasonable business owner might elect to upgrade to a new tablet and use the old one at home, or the owner may decide to upgrade after 6 months and sell the tablet to another business. 

To calculate an object's useful life, an appraiser looks at similar items and calculates how long those items would reasonably be used in business. Taking into account the ways the piece of equipment being appraised differs from these comparable items, the appraiser then determines a reasonable lifespan. 

Appraisers can utilize the useful life concept to determine the remaining useful life of an asset already put into use by the business. For example, the business may have a large-format printing press that is three years old. An appraiser might determine that such an item has a useful life of seven years. Thus, the business would be expected to use the item for four years and then retire it. 

This concept helps businesses determine an asking price for an item they wish to sell or auction so they can receive a fair price that reflects the item's market value. 

The useful life concept is also helpful when it comes to proving the value of leased equipment. A farmer who is leasing a tractor would want to have peace of mind that the tractor was worth more than the sum of the twelve-month lease agreement, or they might want to lease a newer tractor that offered a better deal. 

Appraisers use a number of factors to determine the value of an asset so that buyers and sellers have a fair place to begin negotiations. The useful life concept is just one factor that can help determine an asset's value on the market. An appraiser will also take an item's uniqueness and historical significance into account, since these variables can effect value. Before setting an asset's estimated value, an appraiser will also research how much similar items have sold for, so market fluctuations may play a role in machinery valuation.

 

Tags: Asset Depreciation, normal useful life

How to Determine Physical Deterioration for Asset Depreciation

Posted by Equipment Appraisal Services on Fri, Apr 24, 2015 @ 01:14 PM

physical asset deterioration depreciation

Building on the framework of understanding an asset’s effective age, one can then begin to look at that asset’s physical deterioration.  Physical deterioration is simply an effect of depreciation on an asset caused by physical means, not including economic or functional obsolescence.  In order to find the physical deterioration, take the asset’s anticipated physical life (how long it is supposed to last) and divide it by the effective age.

For an example of this concept, assume an asset has a physical life of 10 years and an effective age of 5 years. With these assumptions, 50% would be the apparent physical deterioration.  This, in the appraisal world, is what is known as the age/life ratio. 

There is the possibility, however, that the asset mentioned may outlive its physical life.  This is where effective age becomes an important factor of the equation. Sometimes, an asset can be taken care of to the point that its effective age outlasts the physical age, which requires the physical deterioration to be altered.  In this case, instead of using merely the physical life in the denominator of the equation, the sum of the effective age and remaining physical life of the asset would be used.  If the physical life were to be used when the effective age is greater than it, it would indicate more than 100% physical deterioration, giving the impression that the asset does not function.

Expanding from the first example, supposed that this same asset still has the physical life of 10 years but has now progressed to have an effective age of 12 years.  This may have been due to a rebuild or overhaul on the equipment. In the process, it has been determined that the asset physically has a remaining physical life of 3 more years.  As a result, the physical deterioration would be 12/12+3, indicating an 80% physical deterioration.

Putting this concept to use, an owner of an asset can use information to determine how much functionality has been used up from an asset, which may assist in its valuation.

Tags: Equipment Appraisal, Physical Deterioration, Asset Depreciation