Notes on Equipment Valuation from Darrell Thorvaldson, AACI, P. App., ASA
March 16, 2020
Relying on dealer ask prices or trending replacement cost new price levels (indexing) provides a general indication of market direction, but these lack the definitive and verifiable information necessary to support a market value opinion. Equipment appraisers incorporate issues of chronological age, effective age, normal useful life, remaining useful life, remaining economic life, physical life, remaining physical life as well as the overall condition description (which may be subject to clear communications with the client for a baseline understanding on what is considered “Good” condition versus “Fair” condition).
Direct sales comparison with active markets provide sufficient number of sales of similar assets that can be independently verified through reliable sources. Examples include rolling assets such as tractor trailers, trucks, machine tools, trailers etc. Unique assets, such as calibration equipment may have an inactive market and valuation may require implementation of the cost approach. The cost approach considers the principle of substitution whereby a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of equivalent utility. The key here is identifying what is a substitute property and does it provide similar utility.
Another important method appraisers use is the Cost-to-Capacity Method that compares similar assets and makes sure we compare “McIntosh Apples to McIntosh Apples” by applying an exponent to adjust for different sizes and different capacities.
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