Equipment Appraisal Blog | Understanding Machinery Appraisals

Elements of Equipment Appraisals: Replacement Cost New

Posted by Equipment Appraisal Services on Mon, Jun 12, 2023 @ 07:30 AM

Machinery and Equipment Appraisals Replacement Cost New

As a business owner, when you determine it is time to sell off older equipment and upgrade to more recent or even brand-new makes and models, you will need to enter the market and begin to research options to effectively handle the transition. It’s only logical that you will seek to understand both new and used machinery pricing based on what is available from dealer networks and other sellers. Obtaining an independent appraisal of your existing fleet will be very helpful in validating and comparing your thoughts and findings, ensuring your ability to make a fully informed decision.

As part of an equipment appraiser’s analysis, they will research and source comparable market information, while also analyzing available databases and their experience valuing similar assets in the past. Used equipment asking prices and recent sales are important to review during this process, however, it is just as important to understand the new machinery market and gain this additional perspective.

Replacement Cost New is the formal term for what brand new equipment should sell for in the current market, or as of the effective date of valuation. Machinery and Equipment appraisers can utilize this component of their research in several ways when comparing it to the other market data they develop. It is a principal element of the Cost Approach to value.

An appraiser should first determine a reasonable pattern or relationship between the new and used pricing while taking into account the equipment’s age, useful life, and commonality in the resale market. For instance, how does new pricing compare to what was originally paid for the machinery being appraised? What are typical levels of market depreciation on a year-to-year basis from newly purchased to the end of the equipment’s initial life cycle?

A seasoned professional will look to estimate new replacement cost for machinery based on available market information from the manufacturer or representative vendors. Utilizing industry trends from broad indexes and applying them to historic pricing is not nearly as reliable as direct market data and should only be used as a last resort. The same goes for developing estimates of depreciation and useful life. An experienced appraiser should never assume straight-line accounting-type depreciation is applicable in the valuation industry.

Even if an appraiser has a multitude of used comparable sales information to consider, they should not neglect to understand replacement cost new, as well as the other components of the cost approach. This complimentary style of appraisal is more reliable and supportable than relying solely on a single approach.

When you decide it is time to replace your equipment and engage an appraiser to assist in the overall effort, ask about these types of methodologies and approaches to ensure you are working with the most competent professionals.

Tags: replacement cost new, machinery & equipment appraisal, used equipment values

How is replacement cost new different than other appraisals?

Posted by Equipment Appraisal Services on Tue, Sep 26, 2017 @ 02:03 PM


When we've been discussing equipment appraisals in the past, we've discussed a number of ways in which machinery may be appraised. But one type of appraisal we haven't gone into depth with is replacement cost new. Because it's only used in certain circumstances, it's a type of appraisal that many people are still unaware of. Here's a quick rundown of how it's different and a situation where it's commonly used.

How is replacement cost new different than other appraisals?

When you purchase insurance on your machinery, it's important to know what type of insurance you have in place. Replacement cost is a commonly used variety, but will only cover the replacement of the machinery with similar machinery. This can backfire for many equipment owners, especially when the equipment has been customized to their operation, such as an extruder that has been customized to their exact needs. An insurance adjustor may not understand the find differences between the types of equipment, dragging your claim out.

For that reason, many people will insure their equipment for replacement cost new. When a technical company in North Carolina had an office flood, they lost a significant portion of the equipment in their computer lab. The insurance company didn't understand that the equipment had been bought over time from a number of sources to ensure the company could work with the wide range of systems their clients were using. Because they had replacement cost insurance, they had to fight with the insurance company for many months to reach a settlement, as the insurance company didn't understand the current value of those machines to the business.

In another example, a company had a break in where several key pieces of equipment were stolen. Because they had replacement cost new coverage on the equipment, they were able to get compensation that allowed them to replace the stolen machinery with equivalent new machinery. This made it much easier for the shop to get back into working condition without too much lost production. Some of the machinery was much older, so finding the same equipment used would have been very difficult and very time consuming for the business. Because of the coverage they had on the equipment, they could find machinery that met a minimum set of specifications and be reimbursed for the purchase of that machinery by the insurance company. For example, an old bandsaw used in the shop provided resawing capability at 3 HP could have been replaced with a new resawing 3 HP bandsaw.

The difference between these two businesses is fairly clear. Both lost older machinery that was difficult to replace. However, one spent months trying to prove the value of the machinery in their business while the other merely had to shop for new equipment that met the same needs in the business. This had a huge impact on the productivity of the business and the amount of time the company's owners had to spend on growing the business versus chasing the insurance adjuster's latest numbers.

When you need to make an insurance claim or otherwise need to know the replacement cost new of your equipment, it's important to work with a certified machine appraiser who has experience in your industry. Why? It's important that they know why particular features and capabilities are vital to keeping your operation moving. They also have the knowledge of how to calculate this machine value accurately, which is important to your claim or need when you've had an equipment loss.

Tags: Insurance Loss, replacement cost new

What is the principle of substitution in machinery appraisal?

Posted by Equipment Appraisal Services on Tue, Feb 09, 2016 @ 07:30 AM


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.

Tags: replacement cost new, principle of substitution, cost approach