If you are considering an equipment appraisal for your used industrial equipment, you probably think that the sales comparison approach works best for it. In most cases, you can be right but you can also be wrong. There are different equipment appraisal valuation methodologies or approaches available when it comes to appraising assets. While many people are very familiar with the sales comparison approach, it’s most suitable for real estate appraisals.
However, it can be used for equipment appraisals as well but it only works if the market for the specific kind of equipment you need to be appraised is steady and big enough, and when there are reliable and readily available sales data to base the appraisal. Otherwise, other approaches would be necessary to determine the true value of your used industrial equipment. These include the following two major alternatives.
- The Cost Approach - as the name implies, this approach is based on the cost or price of the equipment when you purchase it. It also takes into account the substitution theory wherein the cost to replace it new is highly considered. The approach then calculates the value by taking in physical deterioration, functional and economic obsolescense that the equipment has undergone. It perfectly works for valuing installed machinery with a substantial amount of costs related to design, fabrication or assembly, shipment, installation, and so on.
- The Income Approach - this alternative approach takes the income stream that a certain machinery creates to determine its value. In other words, the appraiser needs to know which amount or percentage of income must be allocated to your single used industrial equipment. It sounds very difficult to do so, which is indeed the case. This is why this approach is seldom used in valuing equipment or machinery. However, it can still be used if the appraiser sees it fit.