Which One? Why the Purpose of an Appraisal Determines Equipment Value

By Gary A. Stone, ASA, Manager at Swartz and Associates

My last blog centered on how the manufacturing equipment industry is doing. I ended it with a question: “Which one?” This is also a question we ask when determining value.

Determining Scope

When a client hires us to provide appraisal services, we ask questions to determine the scope of the project. What type of equipment is being appraised? Is an inspection required? When is the appraisal due? What industry does our client operate in? And lastly, what is the purpose of the appraisal?

That last question is important because our clients depend on us to determine the appropriate type of value for the project. Most people outside the appraisal profession may not realize there are different ways to value machinery and equipment. The appropriate value depends on why the appraisal is being performed.

What is a CNC Lathe Worth?

As an example, we can take a large piece of manufacturing equipment, such as a CNC lathe. What is it worth?

NOTE: A CNC lathe is a computer-controlled machine tool that shapes material by rotating a workpiece against stationary cutting tools.

The value of a CNC lathe on the production floor, installed and fully operational, may be different from its value if it must be removed from the facility. Another factor to consider is how soon the machine needs to be sold. Is the seller in a hurry? The answers to these questions can determine a different value.

Fair Market Value

For example, mergers and acquisitions require a value that considers the equipment installed and operating as part of the business. In that situation, we use Fair Market Value—Installed or Fair Market Value in Continued Use. A bank is concerned with what the equipment will sell for if the borrower defaults. Therefore, we use Fair Market Value in Exchange and/or Orderly Liquidation Value when equipment serves as collateral for a loan. An auctioneer uses Forced Liquidation Value to estimate the amount the equipment would bring at an auction. Insurance companies require Replacement Cost because they need to cover the cost to replace their client’s equipment. A CPA firm and company management need Fair Value, as defined by Financial Accounting Standards Board (FASB) accounting standards, for financial reporting.

So, as you can see, “Which one?” is absolutely relevant when establishing the scope of work required in valuing equipment. Our clients depend on it.

Swartz + Associates, Inc. (SAI) is a full service property tax firm specializing in the review, analysis and appeals of real and business personal property tax valuations. If you could benefit from our expertise in appraisal services, please give us a call!