M&E Appraisal Associates, Inc. (“M&EAA”) prepares all machinery & equipment appraisals, inventory appraisals, and medical equipment appraisals in conformance with Uniform Standards of Professional Appraisal Practice (“USPAP”) requirements. USPAP compliant valuation methodology entails the use of three approaches to value: sales comparison, cost, and income.
Inherent in the valuation process is the adherence to the principal of substitution. The principle of substitution is essentially a method for determining the relative value of an asset. The principle of substitution states that a knowledgeable and willing buyer will not pay more for an asset than the price to purchase a substitute asset that performs the same function or service.
The Sales Comparison Approach –
The sales comparison (or market) approach to value involves the use of market offerings and sales of comparable items in determining the value of a subject property.
The Cost Approach –
The cost approach involves the use of the current replacement cost new of an item, less all forms of depreciation to determine the value of a subject property. Depreciation in terms of the cost approach includes physical deterioration, functional obsolescence, and economic obsolescence.
Physical deterioration is a loss in value stemming from wear & tear, exposure to the elements, etc.
Functional obsolescence is a loss in value stemming from a flaw inherent in the subject property, in comparison to its current replacement. Examples of functional obsolescence include slower output or cycle time, inability to perform a specific function, excess capital or operating costs, and other such factors that may be inherent in a subject property.
Economic obsolescence is a loss in value stemming from external causes. Examples of economic obsolescence include a change in market conditions, government intervention or regulation, changes in reimbursement, and other such factors that are external to a subject property.
The Income Approach –
The income approach is based on the premise that value is a function of the future monetary benefit to be received from the ownership of a property. This monetary benefit, or income, is quantified via capitalization or present value discounting of cash flows to arrive at a value. The income approach is difficult to apply and is not regularly used in the valuation of machinery & equipment or personal property.
Concluding Value –
All value approaches are considered as part of the machinery & equipment appraisal process. The sales comparison and cost approaches are typically utilized in determining the value of machinery & equipment. Market information relied upon as part of the sales comparison approach generally includes recent sales or current sales offerings for comparable items. Original equipment manufacturers (“OEM’s”) are typically contacted to determine replacement cost new as part of the cost approach analysis. The appraiser’s knowledge resulting from the valuation of similar machinery & equipment is also typically applied. After the consideration of three approaches to determining value and all relevant data and information, values are then concluded by the appraiser.