Valuing Equipment Installation
Installation costs are one of the variables in equipment appraisal. There are two different reasons why many equipment appraisals wouldn’t include installation values. The most obvious reason is that a great variety of equipment doesn’t have any associated installation costs. Installation costs include freight, delivery, engineering, foundations, wiring and exhaust systems, along with all other costs necessary to make equipment fully functional in place such as calibration. One obvious example of equipment with no installation costs is – this category includes not only transportation units like trucks and commercial trailers, but also most agricultural and construction equipment, as well as landscaping equipment like edgers, mowers, shredders and blowers. That’s a pretty straightforward reason not to include installation costs in an equipment appraisal.
The other reason is that even when equipment does have installation costs (a manufacturing line or food processing facility, for instance) the appraisal value itself can preclude including that value because of a presumption that the equipment would be relocated. Many commonly used equipment appraisal values presume relocation of the equipment and machinery being valued: Fair Market Value, Forced Liquidation Value, Orderly Liquidation Value, Salvage Value, and Scrap Value. No equipment appraisal based on any of these particular value definitions would include installation values simply because there is no installation value once the equipment has been removed.
This brings us to value definitions that include installation values as a consideration: Fair Market Value Installed, Fair Market Value in Continued Use, Replacement Cost New, Reproduction Cost New, and Liquidation Value in Place. Equipment appraisal reports based on these value definitions always incorporate the values associated with equipment installation in the conclusion of value. Industrial relocation factor and moving company
When installation values are included in an equipment appraisal, they are generally calculated using the cost approach to value, taking into consideration any depreciation as appropriate. For instance, assuming similar machines, both with a 20-year normal useful life and normal operating wear and tear, the value associated with installation for a 5-year-old machine would be greater than the value associated with installation on a 20-year-old machine. Why? Because an installation that can be used for 15 years is worth more than one that can only be used for 5 years. And neither of course, would have the installation value of a brand new machine, as in the value associated with Replacement Cost New or Reproduction Cost New.
Of course when calculating Replacement Cost New or Reproduction Cost New for an insurance appraisal, it’s important for the equipment appraiser to get a copy of the insurance policy to determine the exact coverage. Sometimes installation costs may not be covered by the policy and so shouldn’t be included in the valuation.
Jack Young, ASA, CPA, is an Accredited Senior Appraiser (ASA) of the American Society of Appraisers specializing in machinery and equipment and owner of NorCal Valuation in Northern California. Jack is active in the Northern California/Nevada Chapter of the ASA and currently serves as President of the chapter.