UNIVERSITY OF CEBU

MAIN-CAMPUS

COLLEGE OF ENGINEERING
MECHANICAL ENGINEERING

VALUATION OF MACHINERIES
Synthesis Paper 10

ESTELLOSO, REXES V. JR.

BSME – 5

ENGR.CAROL JANE DELAPEÑA BERNABE

INSTRUCTOR
INTRODUCTION
This synthesis paper is all about VAULATION OF MACHINE The estimation
of the monetary measure of the desirability of ownership of commodities and
small properties is accomplished daily in the commercial world, often in an
informal and intuitive manner. However, the complex society of the present
demands systematic and theoretically correct procedures when consideration
is given to the appraisal of enterprises and properties not regularly acquired
on the market The above quotation is valid today as it was when first written.
Value is the end result sought. It is often said after Judge Brandeis that value
is a word with many meanings. While this may imply confusion and
uncertainty, it is an important reminder that the quantity arrived at must, in
every situation, be related to the basis upon which it was estimated and the
purpose for which it was sought. The word value in itself is difficult of precise
definition and usage. Value is a relative term by which the desirability of
ownership of the property in question is stated in terms of other property or
money In most uses of the word value as applied to the property there is
implied by the author or speaker a sense of worth, a desirability of ownership
or possession, or the exchangeability of property as it can be measured in
terms of the dollar or other monetary units Bon bright discusses the
definitions and the basic concepts of value at length in his treatise on the
valuation of property Two basic concepts of value emerged from these
discussions, namely, market value and value to the owner. As for market
value he states Our own preference, at least in the field of appraisal, is for
the previous definition of market value, under which a valuation of property
means merely an attempt to estimate the price for which the property could
be sold by some stipulated seller to anyone else the conditions of the
assumed sale being left for selection by reference to the purpose for which
the valuation is being made For the second concept, value to the owner, Bon
bright proposes. The value of a property to its owner is identical in amount
with the adverse value of the entire loss, direct and indirect, that the owner
might expect to suffer if he were to be deprived of the property.
Valuing Machinery and Equipment (M&E) assets differs from other appraisal
disciplines because an item's value can differ depending on the specific
circumstances of examination, such as liquidation value, going concern value
and/or installation costs. This article will provide some insight into the
terminology and methodology used by professional Machinery & Equipment
appraisers as they develop an opinion of value. When valuing all assets, the
appraiser must determine which of the three standards of value (Fair Market
Value, Fair Value (ASC 820) and Fair Value (Statutory) to utilize and which of
three general approaches to value that can be applied to determine an
opinion of value. Because of that, it is imperative for a client to specify to the
appraiser exactly how the appraisal will be used. One of the critical parts of a
"quality" M&E appraisal is a proper application of the definition of value to
the reason for conducting the appraisal. Client needs dictate what details and
support will be necessary to pass third party reviews of auditors, financial
institutions and governmental agencies .costs can exceed the costs of the
equipment or machinery. Accordingly, used market machinery transactions
will not represent an asset's value to the enterprise.   The major difference
that sets an M&E appraisal apart from other tangible asset appraisals is the
cost of installation. For many assets, the installation .There are three
recognized ways to determine value in appraisal analysis. The Cost
Approach is the starting point for many appraisals and is based upon the
principle of substitution, meaning 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 the subject asset is not new, the
current cost must be adjusted for all forms of depreciation as of the effective
date of the appraisal. The Direct Market or Sales Comparison Approach is
based on the assumption that the value of an asset can be determined
through the examination of transactions of identical or similar items selling in
a secondary or used market, and adjusted for differences in age, condition,
capacity, utility, location, the date of the sale, the type of sale, and/or the
costs of transportation, assembly and installation at a new site.     The
Income Approach examines the earning capacity of the business assets
being investigated and can be very useful but is the least common method of
valuing individual pieces of machinery and equipment .It is important to keep
in mind that a credible opinion of value cannot always be obtained with the
application of a single methodology. It is through the judicious application of
these methodologies that is gained through the proper surveying and
inspection of the subject property, when combined with the experience and
judgment of an objective, qualified, independent and certified professional
appraiser that yields a quality appraisal. The first step in the M&E appraisal
process is to properly classify the asset(s) to be valued into two
classifications .Marketable Equipment is less challenging to value than
special purpose equipment because of the available data to support their
reproduction or replacement cost new and used market estimates. Points of
reference can be developed and used to deduce, support and bracket the
value of the subject asset. Special Purpose Equipment only has Replacement
Cost New as a point of reference for valuation. Any particular deficiencies in
utility or obsolescence must be considered and analyzed on a case by case
basis with the loss in value accordingly reflected. Once the proper level of
current cost new has been determined, deductions from this value must be
taken for all forms of depreciation. Three types or causes of depreciation
must be considered by appraisers .Physical Deterioration is the loss in value
or usefulness of an asset that occurs as a result of the using up or expiration
of its' useful life over time, exposure to natural elements or the process area
environment, internal defects from vibration and operating stress, and other
similar factors .Functional Obsolescence is the loss in value or usefulness of
an asset that is caused by inefficiencies or inadequacies of the asset itself,
when compared to more efficient less costly replacement technology.
Economic Obsolescence is the loss in value or usefulness of an asset that is
caused by factors that are external to the asset, for example- increased cost
of raw materials, labor or utilities (without an offsetting increase in product
price), new environmental regulations, reduced demand for the product,
increased competition, inflation, high interest rates or other similar
contributing factors Machinery and Equipment appraisers use the Direct
Market Comparison (or Sales Comparison) approach to indicate value by
analyzing recent sales (or offering) prices of assets that are comparable to
the assets that are the subject of the appraisal. The transaction or offering
dates of comparable assets must be scrutinized for applicability
(active/verifiable market) to ensure that they are relevant. Additionally, if
characteristics of the comparable assets are not identical to the subject, the
comparable selling prices must be adjusted to place the comparable and
subject assets on an equal basis .Basically, the procedure is to gather sales
and offerings data, determine appropriate units for comparability, analyze the
available data and make adjustments as may be necessary. The used
equipment market is usually priced on an uninstalled (dissociated) basis.
Depending on the premise of value under consideration, costs of delivery,
installation and taxes may need to be added to the market values .As with
the Cost and Income approaches to value, the Direct Market Comparison
method to value assumes that an informed purchaser would pay no more for
the asset than the cost of purchasing a comparable asset with the same
utility elsewhere. Often in a Cost Approach to value, the appraiser will seek
values of selected assets using the Direct Market Comparison method to
validate the values that were obtained using the cost approach. The value of
an asset can be estimated by the anticipated future benefit to the owner. The
Income Approach to value is not widely utilized by Machinery and Equipment
appraisers because of the difficulty associated with attributing a sites' or
business' income to individual assets. When properly applied the income
approach can confirm or enhance the credibility of the values arrived at when
using the Cost or Direct Market approaches to value .Two methods are often
used to value machinery and equipment by the income approach, (a) the
Direct Capitalization approach and (b) the Discounted Cash Flow (DCF)
approach. When applying the Direct Capitalization method, a projected
income stream (constant dollars) is divided by a capitalization rate. The
Discounted Cash Flow approach projects quantity, variability, timing, period
of duration and residual value and discounts them to a present value using a
discount rate. These approaches establish the value of an asset or collection
of assets assuming an ongoing concern or business. This implies that the
subject assets will remain in place and in use as a continuing or on-going
concern at their highest and best use.  Quality appraisals are the direct result
of selecting and applying the proper definition of value to meet the needs of
a client. While the client may define their needs and the intended use of the
appraisal, it is the appraiser's responsibility to determine and apply the
proper premise of value in order to match the intended use. The valuation
process is a systematic procedure that answers client question- "How much
is this worth?" The goal of the valuation process is to deliver to the client a
well-supported opinion of value that shows that the appraiser has considered
all factors materially affecting the asset being appraised.
REFERENCE

[1] Brickey , Honer . "Pricing A Small Business A Delicate Balancing

Act, Ohio  Experts Say." Blade (Toledo, Ohio). 23 February 2004.

[2] Buchanan, Doug. "Business Valuators Must 'Dig Behind the

Hype.'" Washington Business Journal. 15 September 2000.

[3] Desmond, Glenn, and John A. Marcell. Handbook of Small Business

Valuation Formulas and Rules of Thumb . Third Edition. Valuation Press,
1993.