When a company with substantial assets in the form of equipment considers getting a business valuation done, plant and machinery evaluation is an inevitable step in the process. These assets may include machinery used for manufacturing, tools, vehicles, equipment used daily for company operations, etc.
Plant and machinery evaluations differ from other valuations as an item’s value can change depending upon different factors. These factors include liquidation value, going rate in the market, installation costs, etc.
Why Are Plant and Machinery Valuations Done?
Knowing the valuation’s purpose gives the appraiser an idea of what value to consider. The most common purposes for a plant and machinery evaluation are:
- Buying/Selling – Three valuations are considered when evaluating buying/selling. They are fair market value, forced liquidation value, and orderly liquidation value. The relevant value is taken into consideration depending upon the circumstances of the sale or purchase.
- Insurance – To ensure equipment has the proper insurance coverage, businesses perform equipment valuation. The values used for insurance are actual cash value, production cost new and replacement cost new.
- Continued Use – This is required when preparing a financial report or using the equipment as a security for financing. There is no intention of selling the item in this case. The fair market value or forced liquidation value is used in this case.
The process of evaluating machinery is a multi-step process. This article will give you a clear idea of how machinery is evaluated and the different types of equipment appraisals.
How is Plant And Machinery Evaluation Done?
Equipment that needs to be valued undergo the following steps. These steps give a proper valuation that the company can use for various purposes.
- Identification & data collection – The equipment to be evaluated is first identified. Then the data regarding its purchase date and the purchase price is collected. Then the current price of the machinery, as well as the depreciation, is calculated.
- Choosing the right valuation method – There are two methods one can choose from to value equipment. The first is the sales comparison approach, and the second is the cost approach.
Let us look at them in detail.
- Sales comparison approach/market approach – This approach can be applied to machinery commonly available in the market. In this method, the appraiser finds the current going rate for the machinery and similar equipment. The appraiser would look for the value of the machinery in different listings and auction prices by talking to other vendors. This approach is only applicable if the equipment has an active market.
- Cost approach: This valuation method takes into account the current new replacement cost while also considering the functional and economic depreciation of the old equipment. The purchase price of the old equipment is taken, added to the inflation index, and then adjusted to cut down obsolescence, which would then give the current value of the equipment.
- Value determination: One of the above methods is employed to find the value of the equipment. The value derived is accurate if the sales comparison approach is employed and the equipment has a reasonably active market. If the appraiser decides to use the cost approach method due to the equipment being a specialized piece that does not have an active market, this value is then compared and aggregated by taking at least two different types of equipment appraisals.
The value is then determined by careful judging, considering other costs while buying the equipment. This would include the costs for dismantling, re-assembling, shipping, and labour. These have to be added to the value of the machinery if it does not have an active market.
Also Read, Plant and Machinery Valuation: Know Its Worth in the Changing Times!
Work With Trusted Plant & Machinery Valuation Experts
There are different methods as mentioned above which come to aid in the case of a plant and machinery evaluation. When finding the value of the equipment as part of a business valuation, there is not simply the quality of the method in place but also the good judgement and expertise of the valuation specialist that comes into play. A specialist must be able to apply fair values for the equipment. Only then does a fair transaction take place.
At RNC, we are a team of seasoned valuation specialists delivering valued, unbiased, and trustworthy results for over three decades. Our business valuation experts understand every aspect and apply the right approaches to efficiently produce a balanced and reasonable outcome. Apart from experience and knowledge, industry reputation and credibility are key factors that set aside a quality and credible valuation expert like us from any other business valuation services near you.
To get a no-obligation estimate and for more info, get in touch with us today!