Machinery and Equipment has intrinsic value since they can be created, bought, and used for the purposes of income and profits. Often the value is considered when the machinery and equipment comes as an integrated part of a property. As such, a valuation of machinery and equipment (M&E) is useful for determining purchase price allocations.
Valuing M&E is much different than valuing a business or commercial real estate. The values of M&E depend upon things like liquidation value, going concern value, installation costs, and various others. Generally speaking, the quicker one needs the money, the lower value they are able to collect from the liquidation of their M&E.
Since real estate and business values do not generally include installation costs, it is important that the appraiser is very clear about which value is being used. Many appraisers use what is called “the fair market retail value” where the owner is assumed to have purchased the equipment at liquidation prices.
Just like real estate appraisal, the appraisal of M&E consists of three different approaches:
- The Cost Approach – this approach is based upon the assumption that a purchaser would pay no more for an asset than the cost of creating a substitute with identical utility. This value is considered to be the upper limit. Once a value is obtained, adjustments need to be made by accounting for accumulated depreciation.
- The Sales Approach – This approach is based upon the assumption that the value of the business’ assets can be obtained based upon the transactions of similar items selling in the secondary market. Comparable prices of comparable equipment is collected and then adjusted for differences like age, condition, capacity, location, etc.
- The Income Approach – This approach evaluates the earning capacity of the business assets being valued. This approach however, is rarely used when appraising individual machines and equipment, but rather when analyzing and appraising a production line or an entire production plant.
Calculating depreciation is one of the most crucial elements in conducting a M&E appraisal. There are two main categories of depreciation:
- Physical Incurable Depreciation – Physical depreciation is caused from age, wear and tear, exposure and lack of maintenance. Incurable physical depreciation is depreciation that is non-fixable.
- Physical Curable Depreciation – this type of depreciation is fixable.
The age-life method is the most typical way of calculating the level of incurable depreciation. To do this, the appraiser needs information regarding the economic life, effective age, estimated remaining life, normal useful life, and the chronological age of the M&E. By calculating the amount of depreciation that has occurred, the appraiser can conclude upon a fair value for the M&E.
Frazier Capital Valuation has experience valuing M&E from a variety of different industries. Click here to find out more about conducting an M&E valuation with us.