Definition of Appraisal
An appraisal is a process or an act of estimating what the value of an asset will be. An appraisal may also be used to assess the market value, insurable value, or investment value of an asset or property.
In comparison to consulting, an appraisal is quite different from consulting since it deals majorly on the valuation of a property or an asset. Consulting involves evaluation – a process or an act of giving adequate information, analysis of data, and making recommended inference about different problems that are different from estimating value.
What is Value?
Value is defined as the worth of a property, goods, or services in terms of monetary assessment or consideration. For instance, for a machine with a price tag of 50,000€, it will be safe to say that the monetary value of such a machine is 50,000€.
Methods or Approaches of Used Machine Appraisal
There are various methods that can be used for the appraisal of the value of a property or asset. The major approaches or methods include; cost approach, sales comparison approach, and income approach. However, this document will only focus on the income approach of machine appraisal.
Income Approach for Machine Appraisal
When appraising the value of a property or an asset based on the income approach, the present worth of future benefits which can be gained from the ownership of an asset is usually considered. In doing this, the value of such an asset will be measured based on a given level of income. The income approach of valuing an asset in most cases can be used for the estimation of the value of equipment and machinery.
However, when considering an asset value based on the income approach, appraisers who are focused on appraising the value of machinery and equipment (ME) do not or rarely employ this method of appraisal due to some reasons. One of such reason why ME appraisers don’t adopt the income approach of value for machinery and equipment is because; it is usually very difficult to precisely figure out the particular portion or amount of the income stream that is actually coming from the asset, which in this case may be a machine and equipment.
However, appraisers of machine and equipment can, in some cases, be able to adequately employ the income approach of valuing an asset using the right appraisal tools. Generally, the income approach of value appraisal is hinged on the fact that a buyer of an asset always looks forwards to have some rate of return on whatsoever income that is generated by the asset in question.
This income approach of value appraisal and the expectation of the purchaser can be expressed as follows;
Value x Rate = Income
Alternatively, the income approach of value appraisal can also be expressed as follows;
Income = Rate x Value or IRV
Here is a typical illustration to give more insight into how the income approach of value appraisal works, with respect to the value and income return of an asset;
For instance, if a machine or equipment is valued at 50,000€, and the purchaser’s expected rate of return is given at 25%, the expected income on the asset would be 12,500€. This can be well expressed using the above formula for calculating the expected income of a purchaser, as shown above, and then substituting each value into the equation.
Recall that: Income = Value x Rate OR Value x Rate = Income
Where; Value = 50,000€ and Rate = 25% of 50,000€ = 12,500€
So substituting each value into the equation, we have;
50,000€ (Value) x 25% (Rate of return) = 12,500€ (Income).
In capitalization, the annual income gathered from the value of an asset is converted into a substantial value using a capitalization rate. Just like the income generated from the value and rate of an asset, capitalization can be expressed as follows;
With the above equation, assuming an asset appraiser realizes that the rental income stream generated from a machine each year was 12,500€ with a capitalization rate of 25%, it then means that the value of asset will be calculated thus using the formula given above
Conclusively, the income approach method of value appraisal can be used to appraise machinery and equipment that are generally known to generate income once they are put to use. Examples of such machinery and equipment include, but are not limited to aeroplanes, rail cars, heavy construction equipment, and the likes.
Beyond the income approach, cost approach, sales comparison approach of value appraisal, other methods of value appraisal, such as the discounted cash flow analysis, also exist. However, the discounted cash flow analysis is an advanced technique of value appraisal. But, it can also be used for value appraisal of machinery and equipment.