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.