Approaches to Value for Industrial Appraisals
APPROACHES TO VALUE
MARKET (SALES COMPARISON) APPROACH
This approach involves the collection of market data pertaining to the subject assets being appraised. This approach is also known as the ‘Comparison Sales Approach’. The primary intent of the market approach is to determine the desirability of the assets and recent sales or offerings of similar assets currently on the market in order to arrive at an indication of the most probable selling price for the assets being appraised. If the comparable sales are not exactly similar to the asset being appraised, adjustments must be made to bring them as closely in line as possible with the subject property. Depending on the particular item, it may be approached in one of the two following ways:
• An identical match, where manufacturer, age, model number, etc. are identical, or nearly identical.
• A comparable match, where value is established on the analysis of similar, but not identical items, having the same capacity, function, condition, and related factors.
When applying the market data approach, we have endeavored to determine that the subject assets are comparable with market transactions in the following ways:
• Comparability between the asset being valued and the used price found as a comparable is considered. Various characteristics may be taken into account to justify the comparison.
• The availability of a similar asset is important to applying the market data approach. Items found to be comparable must be available when needed.
• Experience and judgment play a significant role in applying the market data approach. Often identical items will be sold at very different prices at different auctions, or offered for sale at substantially different prices from different used equipment dealers. In such situations, the personal experience of the appraiser will be a major factor in analyzing the data and considering the applicability of the market information.
COST APPROACH
This approach is based on the proposition that the informed purchaser would pay no more for a property than the cost of producing a substitute property with the same utility as the subject property. It is used when dependable market data is not available to determine value. It considers that the maximum value of a property to a knowledgeable buyer would be the amount currently required to construct or purchase a new asset of equal utility. When subject asset is not new, the current cost must be adjusted for all forms of depreciation as of the effective date of the appraisal. Information sources in the application of this approach may include contact with the manufacturer, catalogs, price quotations, paid invoices, accounting schedules, and new equipment dealer price surveys. Three types of depreciation considered in making adjustments to value in the Cost Approach are defined below.
• Physical Deterioration is the loss of value resulting from wear and tear of an asset in operation and exposure to various elements. The most common method of measuring physical deterioration is to determine the effective age and its economic or useful life. This is expressed as a formula; age divided by economic life, to arrive at a percentage that is deducted from new replacement cost.
• Functional Obsolescence is the loss of value of property as a result of the development of new technologies. This includes such things as changes in design or production methods or processes, over capacity, excess construction, and lack of functional utility or excess operating costs.
• Economic Obsolescence is a form of depreciation or loss of value caused by unfavorable external conditions. Causes may include such things as the economics of a specific industry, availability of financing, lack of material or labor shortages, new laws or regulations and environmental considerations.
The Cost Approach is used to provide a meaningful estimate of value on specialized machinery, equipment, or systems, where sale transactions are difficult to find, or where a small number of transactions will not provide dependable market data. Also, this will usually be the approach used to appraise special assets such as production tooling, inventories, work in process and similar assets where comparable sales results and market data is not available.
INCOME APPROACH (Investment Approach)
This approach considers value in relation to the present worth of future benefits derived from ownership and is usually measured through the capitalization of a specific level of income. This approach is the least common approach used in the valuation of machinery and equipment since it is difficult to isolate income attributable to such assets. The Income Approach was not considered appropriate for this assignment and not considered or utilized in this particular appraisal.
RECONCILIATION OF APPROACHES
In any appraisal, all three approaches to value must be considered. One or more may be applicable to the subject assets being appraised. In some instances, elements of more than one approach may be used to reach a conclusion of value. For this appraisal, as with most machinery and equipment personal property appraisals, consideration has been given to the Market Data and Cost Approaches, or a composite of cost and market approaches combined with the appraisers’ general knowledge of the market