Appraisals are used for many different reasons. They could help a bank or other financial institution gain an understanding of the value of the asset before a funding takes place. The appraisal could also include projections of asset value for the full term of the financing and at maturity, as is often needed when the equipment lease terms assume a residual position.
Many factors come into play when the appraiser determines a value. In the Uniform Standards of Professional Appraisal Practice guidelines the appraiser is required to consider three approaches to value; the cost approach which takes into account a reproduction and/or replacement cost for the asset, less various types of depreciation which are outlined below, the market or comparison approach which uses actual market analysis of what has been sold or is currently available for sale, and the income approach which can be used if the asset generates income that can be measured accurately. Once all three approaches have been analyzed the most appropriate approach is used to determine value.
Equipment of all types loses value over time. The most common loss of value comes from the wear and tear the equipment experiences as it is used. This is referred to as physical depreciation as it deteriorates, and is best evaluated by using maintenance logs and through direct observation. The equipment can also lose value through the environment in which it is used, such as outdoors, in harsh chemical, dirty or heavy usage environments. Physical deterioration can, in most cases, be corrected or cured with an overhaul or upgrades, depending on the type of problem.
The equipment can also lose value due to inherent short comings in the equipment itself. Maybe its capacity is too slow compared to more modern machines, it isn’t computer controlled, or maybe costs too much to operate. This is known as functional obsolescence. In some cases the obsolescence can be cured through upgrades to the equipment, but in many cases the loss in value can’t be overcome.
There is also the obsolescence that can come from forces external to the equipment, such as a determination by a government agency that it is unsafe to operate, there isn’t a market for the materials generated by the equipment, or there is a shortage of materials required to run the machine.
The appraiser must take all these things into consideration before rendering a value. The personnel at LMI are experienced in performing the necessary research and analysis so that an accurate report can be provided to the client. The client must be prepared to provide all equipment information they have available, including, but not limited to, the purpose of the appraisal, how it is to be used, a complete list of the equipment with components and features with serial and model numbers, original cost, purchase invoices, maintenance logs, hours of operation, etc.