Equipment Appraisal Blog | Understanding Machinery Appraisals

Effective Age vs. Chronological Age with Machinery & Equipment

Posted by Equipment Appraisal Services on Mon, May 03, 2021 @ 08:00 AM

Machinery and Equipment Effective Chronological Age

Image source: FNQ at en.wikipedia license

When you are considering buying, selling, investing in, or financing machinery & equipment, the age of the assets will play an important role in determining the fair market value and ultimately, the price you are willing to pay or accept for it.

Useful Life

The useful life of equipment is generally considered just a guideline that estimates when the asset would need to either retire from service or need refurbishing and reinvestment to prolong its life. Many factors can affect this estimate such as usage, maintenance, technology, and overall manufacturing quality.

Chronological Age

The chronological age of machinery & equipment is simply calculated from the date of its original manufacturing to the effective date you are considering, usually a current date. So, as an example, if a used Caterpillar excavator was originally built in 2011 and you want to purchase it today, the chronological age of that asset would be 10 years.

Effective Age

Using that same example, over the 10 year period from 2011-2021, the specific Caterpillar excavator you’re looking to purchase, sell or finance, will have a certain number of hours logged, will have a specific prior sales history (1 owner or multiple), been under a good or not so good maintenance program each year and possibly had certain major components replaced over that time.

All of these factors will play a part in considering an adjustment to the chronological age which would create a more realistic effective age.

If the excavator was only used 1,000 hours per year, that might be construed as half or even less than normal usage, while being maintained on a daily basis. On the flip side, if the machine had over 20,000 hours on it with no component replacements over the 10 year period, you would take a hard look at what would need to be invested into it to bring the machine into good operating condition and extend its life.

In many industries, you will see certain types of equipment originally manufactured decades ago while still in good operating condition. These machines have likely not been affected by changes in technology and have been well maintained with component parts replaced as needed over their lifetime.

There are also plenty of examples of machinery in heavy usage environments such as mining and aggregate, that well exceed normal operating hours which could have an adverse effect on value. However, as long as these machines are well maintained with components replaced as needed, these assets are durably built and designed to last a long time.

In summary, effective age is an important component to understanding machinery & equipment value. While it is a subjective estimate based on a number of variables, it provides a working guideline to appraising and ultimately understanding what you should be buying and selling these assets for at any given time.

Tags: effective age, Machinery & Equipment Appraisals, useful life, chronological age

Determining Depreciation and Useful Life for Machinery & Equipment

Posted by Equipment Appraisal Services on Mon, Dec 28, 2020 @ 08:00 AM

Appraisers Depreciation Useful Life

When appraisers look at variables in an equipment valuation, two of the key factors taken into account are useful life and depreciation. Though the process may seem straightforward, machinery & equipment appraisers look at different characteristics that assist in determining useful life and depreciation within the current market. This differs from the prescribed approach a certified accountant takes.

Accounting Methodology of Determining Depreciation and Useful life

When it comes to capitalized machinery & equipment on a company’s books, accountants treat depreciation and useful life according to accepted principles. One such principle is the Modified Accelerated Cost Recovery System (MACRS). This method is based around a uniform, straight line reduction in value, or depreciation, which starts with the acquisition price of the equipment and amortizes that price, or initial value, equally over a standardized term, usually five to seven years. The endpoint of the depreciation is typically zero.

An Appraiser’s Market Driven Methodology of Determining Depreciation and Useful Life

When appraisers value machinery & equipment, they research the market to find as much information as reasonably possible to estimate its current value. Depreciation and useful life are two components of this analysis, and can be determined through relevant third party sources that buy, sell and utilize the type of assets being appraised. This is a direct market derived approach to understanding these variables more in tune with the reality of how they are valued over time and how long they can reasonably be expected to operate effectively before needing major rebuilds/overhauls or retire from service entirely.

It is important to understand these factors and take them into account as part of a complete market analysis which will also include reviewing comparable sales of the equipment being appraised. Market comparable data can oftentimes be limited or inconsistent across different sources and a balanced understanding of market depreciation and useful life can complement this data and provide reasonableness checks to the comparable sales.

Developing Market Depreciation Curves for Asset Classes of Machinery & Equipment

Once an appraiser has completed a number of valuations in specific markets and industries, they can consider creating a database of values which results in the development of market driven depreciation curves that will further serve as a reasonable source of historical data to consider on future valuations. This would be similar to the concept of subscription databases that are publicly available in certain markets such as construction, automotive and over the road transportation in today’s resource networks.

In summary, when your business needs an updated true market assessment of value for their capital assets, always look to an accredited equipment appraiser to complete the assignment.

Tags: understanding fair market value, depreciation of equipment, equipment valuation, market value, useful life