Valuing Machinery and Equipment Ed 3 PDF

Valuing Machinery
Valuing Machinery
and Equipment:
and Equipment:
TheFundamentals
The Fundamentals
of Appraising
of Appraising
Machinery and
Machinery
Technical and
Assets
Technical Assets
Third Edition
American Society of Appraisers
Third Edition

Valuing Machinery and Equipment:
The Fundamentals of Appraising Machinery
and Technical Assets
Third Edition
by
Machinery and Technical Specialties Committee
of the American Society of Appraisers
ISBN 0-937828-07-6
© Copyright 2000, 2005, 2011 by the

American Society of Appraisers,
Washington, D.C.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form by any means, electronic, mechanical photocopying,
recording or otherwise, without the prior written permission of the American Society of
Appraisers, 11107 Sunset Hills Rd., Suite 310, Reston, VA 20190.
Published in the United States of America.
For information about the American Society of Appraisers, call (800) 272-8258 or (703)
478-2228, or write American Society of Appraisers, 11107 Sunset Hills Rd., Suite 310,
Reston, VA 20190.
Table of Contents
Chapter 1 Introduction
Chapter 2 Classification and Description of Machinery and Equipment
Chapter 3 Cost Approach
Chapter 4 Sales Comparison Approach
Chapter 5 Income Approach
Chapter 6 The Three Approaches to Value for a Process Plant
Chapter 7 Appraising Assets in Groups
Chapter 8 Report Writing
Chapter 9 Valuing For Financial Reporting Purposes
Chapter 10 Ethics
Chapter 11 Leasing
Chapter 12 Inventory
Chapter 13 Marine Asset Appraisals
Chapter 14 Aircraft Appraisal
Chapter 15 Use of Technology in MTS Valuation
Chapter 16 Technical Specialties
Chapter 17 Cost Segregation Studies
Chapter 18 International Machinery and Equipment Valuations
Appendix A Accounting Depreciation
Appendix B Compound Interest
Appendix C Financial Tables
Appendix D Quick Reference Tables and Conversion Factors
Appendix E Useful Data
Appendix F Licensing of MTS Appraisers
Appendix G Published Prices and Sources of Information
Appendix H Recommended Readings
Appendix I Valuation Process For Financial Reporting
Glossary of Terms Machinery and Technical Specialties
Preface
There is little argument today, among appraisal and valuation users, regulators and
practitioners, but that the profession has been accelerating to meet global appraisal and valua-
tion needs. One can look no further than to the recent/continuing global financial and economic
crisis to find evidence of the need for such acceleration in the practice of and understanding
of our profession.
Response to such needs can be seen in the work of The Appraisal Foundation in the
United States and the International Valuation Standards Council globally. Both bodies are
working cooperatively to address standards for appraisal and valuation; and just as impor-
tantly, working together to produce and promote best practices in appraisal and valuation
of specific property types, assets and liabilities. Such measures are a significant example of
the growth and recognition of our profession on the world stage. American Society of Ap-
praisers ASA designated professionals are active in both bodies assisting these needs. In my
years of appraisal and valuation practice, I have always regarded the 1937 work of James C.
Bonbright’s “The Valuation of Property – A Treatise on the Appraisal of Property for Different
Legal Purposes” to be the grandfather text on appraisal and valuation practice. Many authors
and groups of authors (Bonbright’s was a group) have over the years addressed and updated
the practice of appraisal; some dedicated to the whole profession and others being discipline
centric. Our own Henry A. Babcock, FASA, for example, provided us with “Appraisal Prin-
ciples & Procedures,” printed by ASA in 1980.
Babcock’s work was utilized for teaching and practitioner reference covering the
fundamentals of property appraisal. In the field of machinery and equipment appraisal and
valuation, the Machinery & Technical Specialties (“MTS”) discipline of the American Society
of Appraisers (“ASA”) has been and continues to be a leader domestically and globally in con-
tributing to best practices, following in the footsteps of these appraisal and valuation leaders.
Leadership globally in the appraisal and valuation of machinery and equipment can
be traced back to ASA members holding the MTS designation, who have tirelessly given of
themselves and their individual practices to cooperate with appraisal and valuation bodies
around the world. Formally, in the machinery and equipment practice, several of ASA’s –
MTS leaders have been instrumental in establishing the International Conference on Valuation
of Plant, Machinery & Equipment, commencing in Gujarat, India, in 1998. ASA MTS desig-
nated individuals maintained a strong tie to this endeavor and in 2007, the MTS Committee
became a sponsor of this conference, held in London. In 2009, not only did this sponsorship
continue, but the MTS Committee became the organizer of the 6th International Conference
held in San Francisco. These conferences bring together machinery and equipment appraisal
and valuation specialists and experts from around the globe – principally to address needs
from the profession to meet today’s and tomorrow’s marketplace, and the best practices to
meet such needs.
Continuing in their leadership role, the MTS Committee now brings forth the third
edition of Appraising Machinery & Equipment, a timely update on appraisal and valuation
practice by a group of knowledgeable and widely respected professional appraisers and valu-
ers. As with past editions, this book will be cited as an authoritative source for the appraisal
and valuation of machinery and equipment.
Lee P. Hackett, FASA FRICS CRE
Trustee, International Valuation Standards Council
Director, ASA Educational Foundation
Acknowledgements
This third edition of Valuing Machinery and Equipment was initiated at the request
of V. Neil Thompson, the 2007-2009 Chair of the Machinery and Technical Specialties
Committee (MTSC) of the American Society of Appraisers (ASA).
The writing and preparation of this text is the culmination of the efforts of a num-
ber of appraisal professionals. These individuals have contributed countless hours to this
project and it is their dedication and commitment to the profession that have made this
manuscript possible. From writing to reviewing, advising to critiquing, each one of the
following individuals has provided valuable input in one form or another.
David H. Cole, ASA Arthur E. Narverud, ASA
Kenneth M. DuFour, ASA Gregory McEachern ASA
Alan C. Iannacito, FASA Robert B. Podwalny, FASA
Douglas R. Krieser, ASA, FRICS Michael J. Remsha, ASA
Norman F. Laskay, ASA Wade L. Young, ASA
John A. Matthies, ASA Robert J. Zises, ASA
Leslie H. Miles, Jr., FASA
There were many others who contributed the time and talents to making this book
current who have decided to remain anonymous – we are grateful for their hours of writing,
review, and dedication.
The coordination, writing, editing, and reviewing of this publication took place in
2009-2011, during which the MTSC members were
MTS Committee Officers MTS Committee Members Emeritus Members
Chair: J. Greg McEachern, ASA Merritt Agabian, FASA
Peter J. Campbell, ASA Karen Miles Milan, ASA Ralph C. Albierti, ASA
Vice Chair: Joseph M. Santora, ASA John Alico, FASA
Jack Beckwith, ASA Charles W. “Bill” Ruth, ASA Kal Barrow, ASA
Secretary: Barry J. Savage, ASA John Connelly, III, ASA
Robert W. Clark, ASA Thomas A. Sexton, ASA Melvin Fineberg, ASA
Treasurer: Samuel Shapiro, ASA Gerald Huether, ASA
Douglas R. Krieser, ASA, FRICS Steve C. Tatro, ASA Alan C. Iannacito, FASA
MTS Governors: Jackson P. “Buck” Ward III, ASA William F. Jacobs, ASA
Charles C. Dixon, ASA Norman F. Laskay, ASA
Daniel L. Lagace, ASA MTS Committee John Madge, FASA
Immediate Past Chair: International Members Kenneth A. Martin, FASA
V. Neil Thompson, ASA Ildefonso Acevedo, ASA Leslie H. Miles, FASA
Nuno Agostinho Batata, ASA Arthur E. Narverud, ASA
MTS Committee Members Brad Hartsburg, ASA H. Denis Neumann, ASA
Richard Berkemeier, ASA Norberto J. Levin, ASA Robert Podwalny, FASA
Sharon Desfor, ASA, MRICS Irina Rykun, ASA Jack Washbourn, ASA
John A. Matthies, ASA John C. Wood, ASA
This third edition has been built upon the very strong efforts that went into the
development of the previous 2000 and 2005 editions. We again thank the contributors to
these previous editions.
Special thanks to Richard Berkemeier, MTS Education Chair and MTSC Chairman
2011-2013, who coordinated the review process.
The MTSC expresses its gratitude and thanks for the effort and countless hours
expended by Gerald L. Huether, FASA, who chaired the subcommittee forming this book,
enlisted its contributors, and began the whole process, and by Mrs. Donna M. Rocca, who
assisted in the assemblage of all of the information that went into this publication.
Sharon Desfor, ASA, MRICS

Production Manager
Valuing Machinery & Equipment, 3rd Edn.
Disclaimer
This book is not intended to be an advanced text. Neither is it meant to be a defini-
tive or complete statement of the theory and methods of appraising machinery, equipment,
and industrial assets and facilities.
The American Society of Appraisers (ASA) emphasizes that this book is not au-
thoritative. It is intended to be used as a research and review tool, and as a foundation
for lectures and discussions in conjunction with the ASA’s Principles of Valuation basic
courses and the many Advanced courses available to its members. The following rules
must always be observed:
• The valuation process and approaches must be used by competent appraisers;
• The examples given demonstrate only one way that individual valuation meth-
ods could or should be done; and
• No appraisal may be taken as a “cookbook” process or approach which would
apply to any other appraisal.
Every appraisal must be based on full knowledge of the facts and circumstances
of the subject asset(s), as well as the industry and the economic environment in which the
asset(s) exist and produce. A particular valuation process or approach that is relevant for
one asset at a particular point in time may not be appropriate for another asset or a different
point in time.
The Machinery and Technical Specialties (MTS) appraisal field is so vast that no
single text could contain all the required information. The authors have sought to present
a comprehensive overview of the MTS appraisal discipline, useful as an introduction for
those new to the field and a convenient reference and review tool for experienced valuation
professionals. In-depth study of specific aspects of machinery and equipment valuation is
left to other texts and classes.
In machinery, equipment, and other technical specialties fields, as in any profes-
sional discipline, one will find a variety of acceptable techniques for solving problems.
Because the authors have chosen to include certain methods and theories in the book does
not mean that other methods and theories not included herein are in any way inferior or un-
acceptable. Through a process of discussion and debate, the authors arrived at a consensus
on material to be included in the book. Future editions may include additional or different
techniques, as the theory and methods of appraising machinery, equipment and industrial
assets and facilities continue to evolve in this vibrant, developing field.
1
Introduction
Objectives:
1. Define important terms.
2. State the basic concepts of value.
3. Specify the different definitions of value used by machinery and
technical specialties (MTS) designated appraisers.
4. Introduce the three approaches to value.
5. Differentiate price, cost, and value.
6. Contrast accounting and valuation depreciation.
7. State appraisal purposes, objectives, and events that influence
appraisal value.
8. Describe the types of clients encountered by MTS appraisers.
Definition of Appraisal and Value

Appraisal is the act or process of developing an opinion of value.1 Value has been
defined as the monetary worth of property, goods, or services.2 The American Society of
Appraisers (ASA) has broadened the definition of appraisal to include any of the four fol-
lowing operations, independently or in combination:
1. Determination of the value of property.
2. Estimation of the cost of (a) production of a new property, (b) replacement
of an existing property by purchase or production of an equivalent property,
or (c) reproduction of an existing property by purchase or production of an
identical property.
3. Determination of the nonmonetary benefits or characteristics that contribute
to value; the rendering of judgments as to age, remaining life, condition, qual-
ity, or authenticity of physical property.
4. Forecast of the earning power of property.3
The appraisal of machinery, equipment, and certain other business assets4 encom-
passes all four of these meanings.
In this book, the terms appraisal and valuation are used interchangeably. The
Uniform Standards of Professional Appraisal Practice (USPAP) distinguishes between
appraisal and consulting. USPAP defines appraisal consulting as the act or process of
developing an analysis, recommendation, or opinion to solve a problem, where an opinion
9
Introduction
of value is a component of the analysis leading to the assignment results.5 For some pur-
poses, the distinction between appraisal and consulting is important, but in this book, we
will generally not be concerned with making fine distinctions between the two activities.
Definitions of Value Relating to MTS Assets

The underlying theme and elements of the definitions presented here are based in
standard appraisal theory. Many terms are used to describe various thoughts or premises of
value. These definitions are offered to provide the fundamental value concepts; they are not
the only acceptable definitions, since contracts or jurisdictions may dictate somewhat dif-
ferent philosophies. Therefore, these definitions may be expanded or refined as the purpose
and function of an appraisal dictate, as long as the fundamental concepts are not altered.
In other cases, the laws of a country, state, region, or regulatory agency may require other
terms, which therefore would take precedence over the definitions shown here.
Because the machinery and technical specialties (MTS) appraiser deals with a vari-
ety of assets, most of which can be moved, it is necessary to recognize different definitions
of value. These can be broadly classified into three categories, distinguished mainly by an
asset’s anticipated use:
1. Sale for removal for a similar or alternate use,
2. Continued (or as installed) use of the asset for the purpose for which it was
designed and acquired,
3. Liquidation.
Hence, use of the term value or fair market value is modified or refined to cre-
ate special definitions to fit the needs of a particular appraisal. These modifiers provide
a specific definition of value to guide the work of the appraiser. The following list of the
various definitions of value that the appraiser will encounter is not intended to be complete.
The list begins with a basic definition of fair market value and then presents the various
refinements of the term that are used to fit the needs of the appraiser.
Sale for Removal or Alternate Use

Fair Market Value is an opinion expressed in terms of money, at which the property
would change hands between a willing buyer and a willing seller, neither being under any
compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of
a specific date.
Fair Market Value – Removed is an opinion, expressed in terms of money, at which
the property would change hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or to sell and both having reasonable knowledge of
relevant facts, considering removal of the property to another location, as of a specific date.
Continued Use (or Capacity for Use)

Fair Market Value in Continued Use with Assumed Earnings is an opinion, ex-
pressed in terms of money, at which the property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or to sell and both
having reasonable knowledge of relevant facts, as of a specific date and assuming that the
business earnings support the value reported, without verification.
10
Introduction
Fair Market Value in Continued Use with an Earnings Analysis is on opinion, ex-
pressed in terms of money, at which the property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or to sell and both
having reasonable knowledge of relevant facts, as of a specific date and supported by the
earnings of the business.
Fair Market Value — Installed is an opinion, expressed in terms of money, at which
the property would change hands between a willing buyer and a willing seller, neither being
under any compulsion to buy or to sell and both having reasonable knowledge of relevant
facts, considering market conditions for the asset being valued, independent of earnings
generated by the business in which the property is or will be installed, as of a specific date.
These concepts are all similar with some minor nuances. In each of these instances
the property is capable of being used at its present location. Therefore, the amount includes
the depreciated value associated with all normal direct and indirect costs, such as instal-
lation and other costs, to make the property fully operational. The continued use concepts
consider the property as a part of a business enterprise whereas the installed concept con-
siders the property separate from the business enterprise and gives no consideration as to
whether the property is or is not being used. Since the two continued use concepts consider
the use of the property, economic justification is required for the determined value. Under
assumed earnings concept, the appraiser assumes there exists economic justification for
the reported value, and under the earnings analysis concept, an analysis of the business
earnings needs to be undertaken to provide justification for the reported value.
Liquidation
Orderly Liquidation Value is an opinion of the gross amount, expressed in terms of
money, that typically could be realized from a liquidation sale, given a reasonable period of
time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is,
where-is basis, as of a specific date.
Forced Liquidation Value is an opinion of the gross amount, expressed in terms of
money, that typically could be realized from a properly advertised and conducted public
auction,6 with the seller being compelled to sell with a sense of immediacy on an as-is,
where-is basis, as of a specific date.
Liquidation Value in Place is an opinion of the gross amount, expressed in terms
of money, that typically could be realized from a properly advertised transaction, with
the seller being compelled to sell, as of a specific date, for a failed, non-operating facility,
assuming that the entire facility is sold intact.
All of the liquidation concepts require a seller being compelled to sell whereas
the fair market value concepts include a willing seller with no compulsion. The primary
difference between orderly and forced liquidation is the assumed time period for selling
the property. Orderly liquidation value provides for a reasonable period of time, and forced
liquidation value provides for a sense of immediacy. Orderly liquidation value and forced
liquidation value assumes the property would be sold piecemeal and liquidation value in
place assumes the entire facility is sold intact.
All of the definitions listed in this text may be expanded or redefined by the ap-
praiser as the purpose and function of the appraisal dictate, so long as the fundamental and
11
Introduction
underlying concept is not altered without a compelling reason such as being required by
law.
Others
Other important value definitions include the following:
Salvage Value is an opinion of the amount, expressed in terms of money, that may
be expected for the whole property or a component of the whole property that is
retired from service for possible use elsewhere, as of a specific date.
Scrap Value is an opinion of the amount, expressed in terms of money, that

could be realized for the property if it were sold for its material content, not
for a productive use, as of a specific date.
Insurance Cost New is the replacement or reproduction cost new as defined
in the insurance policy less the cost new of the items specifically excluded
in the policy, as of a specific date.
Insurable Value Depreciated is the insurance replacement or reproduction cost
new less accrued depreciation considered for insurance purposes, as defined in the
insurance policy or other agreements, as of a specific date.
Definitions for values and value premises other than those presented above may be
acceptable. The appraiser may expand or refine a definition as the purpose and function
of the appraisal dictate, as long as the fundamental and underlying concept is not altered
without a compelling reason (such as being required by law).
Price and Cost Distinguished

The appraiser often receives financial information about the property to be ap-
praised in which the terms price, cost, and value are used interchangeably by accountants
and the general public. Appraisers carefully distinguish between these terms.
Price is defined as the amount a particular purchaser agrees to pay and a particular
seller agrees to accept under the circumstances surrounding their transaction.7 A price, once
finalized, refers to a sale or transaction price and implies an exchange. In other words, price
is a fact.8 The price paid for a particular asset may be higher or lower than, or equal to, the
asset’s value.
The term cost is used by appraisers in relation to production, not exchange. Cost
may be either an accomplished fact or a current estimate.9 It is defined as the total dollar
expenditure for any asset.10 The cost of a particular asset may be higher than, lower than,
or equal to the asset’s value.
The terms price, cost and value may have different interpretations by various ap-
praisers. One example might be to say that price is what is marked, cost is what is paid, and
value is what one may obtain after the purchase.
Approaches to Value
There are three generally recognized approaches to the determination of value: cost,
sales comparison, and income.11 These approaches are widely accepted by financial institu-
tions, courts, government agencies, business, and society in general, and they establish
12
Introduction
theoretical concepts and systematic methods. These approaches are briefly defined here
and are discussed in detail in later chapters.
• Cost approach: The appraiser starts with the current replacement cost new
(or in some circumstances the reproduction cost new) of the property being
appraised and then deducts for the loss in value caused by physical deteriora-
tion, functional obsolescence, and economic obsolescence. The logic behind
the cost approach is the principle of substitution: a prudent buyer will not
pay more for a property than the cost of acquiring a substitute property of
equivalent utility.12
• Sales comparison approach: The appraiser adjusts the prices that have been
paid for assets comparable to the asset being appraised, equating the compa-
rables to the subject.
• Income approach: The appraiser determines the present value of the future
economic benefits of owning the property.
Although USPAP requires that each of the three approaches to value be considered
when it is necessary for credible assignment results, the valuation of certain assets or the
valuation definition under consideration may make the development and use of all three
approaches impractical. The cost approach, without sufficient research and quantification
of depreciation and obsolescence, may not accurately reflect the value of a particular asset.
It may not be possible to use the income approach to determine the in-use value of equip-
ment because it may be impossible to isolate the income attributable to the equipment. The
sales comparison approach would be impossible to use for a one-of-a-kind machine that
has never been exposed to, or sold in, the marketplace. There are many other examples.
The valuation circumstances involving a particular asset may not allow the application and
correlation of all three approaches to value. This is consistent with Standards Rule 7-4 of
USPAP, which requires the appraiser to consider all three approaches to value and decide
which approaches are applicable to the situation at hand.
Valuation Depreciation and Accounting Depreciation

Depreciation is another term that appraisers use differently from nonappraisers
such as accountants and the general public. The valuation concept of depreciation differs
from the accounting concept of depreciation. Depreciation for valuation purposes is the
estimated loss in value of an asset, compared with a new asset; appraisal depreciation
measures value inferiority13 caused by a combination of physical deterioration, functional
obsolescence, and economic (or external) obsolescence.
It is important for the appraiser to understand that currently in the United States
the accounting depreciation process is one of cost allocation only, with certain exceptions
addressed in Chapter 9, Valuing for Financial Reporting. It is not a method of valuation.
Because a company’s fixed assets are not held for resale, there is no attempt to reflect
any change in the market value of the assets. As depreciation is calculated from period to
period, it is added to an accumulated depreciation account. Depreciation for accounting
purposes may be thought of as a mathematical procedure for recovering the original cost of
an asset in consistent installments over a specified period.
13
Introduction
Thus, the primary difference between the valuation and accounting concepts of
depreciation is that appraisal depreciation measures value inferiority, whereas accounting
depreciation is a mathematical convention for recovering an asset’s cost. Valuation depre-
ciation is covered in Chapter 3, which discusses the cost approach.
Other Accounting Terms

The appraiser will often work with information furnished by the accounting or
financial departments of manufacturing and commercial enterprises. The appraiser should
have a basic understanding of accounting terms and their relation to valuation concepts.
In addition to cost, price, and depreciation, the appraiser encounters other account-
ing and financial terms. Some of these terms refer to the methods used to account for a
company’s assets. In the accounting process, the accountant either capitalizes or expenses
the costs incurred or prices paid for certain items. If the expenditure is capitalized, the
item is considered a fixed asset, and the appraiser finds the original cost of the asset (in
the hands of its present owner) entered into the owner’s fixed asset record. Its cost will be
recovered through accounting depreciation. These procedures are designed to record costs
in accordance with generally accepted accounting principles (GAAP) in the United States,
or International Financial Reporting Standards (IFRS) elsewhere in the world. Tangible
assets used in the operation of the business that are not intended for resale to its customers
are generally referred to as plant, property, and equipment, or fixed assets.
Usually, the accounting record assigns the fixed assets to account for land, land
improvements, buildings, and equipment. Except for land, these assets are depreciated over
a predetermined service life. Land is retained at cost and is not depreciated on the account-
ing record.
Again, it is important to understand that the accounting depreciation process is
one of cost allocation only; it is not a method of valuation. Accumulated depreciation
represents the total accounting depreciation taken against the cost of an asset since it was
acquired as of a given date and depends on the accounting method used. Subtracting ac-
cumulated depreciation from cost yields the net book value, which is the capitalized cost
of an asset less the accounting depreciation taken for financial reporting. It is typically
derived through a cost allocation process, not a valuation process.
The cost of the asset may or may not be the same as its depreciable cost, which is
the accounting cost of a property less the estimated salvage value that can be obtained for
the property at the end of its useful life. The salvage value is an opinion of the amount,
expressed in terms of money, that may be expected for the whole property or a component
of the whole property that is retired from service for possible use elsewhere, as of a specific
date. Again, it is important to note that in using the term value, selected modifiers clearly
define the type of value. On occasion, the net book value may approximate an appraisal
value; however, that occurs only by chance.
The life of the asset on a company’s books is also an accounting concept. In theory,
the depreciable or book life for GAAP or IFRS purposes should reflect the company’s esti-
mate of the asset’s expected useful life, whereas the tax life is prescribed by tax regulations
and may differ materially from the asset’s expected useful life. The Machinery & Technical
Specialties Committee of the ASA has developed a Normal Useful Life book by category
as an example of an economic life as opposed to accounting or book life. However, the
14
Introduction
appraiser will find companies that choose to base their GAAP or IFRS (i.e., book) lives
on the federal income tax cost recovery schedules, such as the Modified Accelerated Cost
Recovery System (MACRS). Under this system, companies are generally required to use
lives of five to seven years for equipment depending on the taxpayer’s industry classifica-
tion, 15 years for land improvements, and 39 years for buildings.
The amount of accounting depreciation taken over the life of an asset cannot exceed
its cost. Once the net book value reaches zero, no more depreciation is taken. However,
the “fully depreciated” asset may remain in service and still have a value for valuation
purposes.
The Valuation Process

The valuation process is a systematic procedure used by appraisers to provide an-
swers to their clients’ questions about value and value-related issues. It begins when the
appraiser fully understands and identifies the appraisal problem at hand and concludes
when the appraiser reports the solution to the client. The number of steps taken to solve the
problem depends on the nature of the appraisal engagement and the availability of data. In
any appraisal assignment, the goal of the valuation process is to produce a well-supported
opinion of value showing that the appraiser has considered all factors that materially affect
the value of the assets being appraised.
The valuation process is best summarized by Standard 7 Rule 7-2 of USPAP that
states:
“In developing a personal property appraisal, an appraiser must:
(a) identify the client and other intended users.14 The appraiser should clearly
identify who is the client in the process and who are all of the intended users
of the appraisal.
(b) identify the intended use of the appraiser’s opinions and conclusions.15
(c) identify the type and definition of value, and, if the value opinion to be devel-
oped is market value, ascertain whether the value is to be the most probable
price:
(i) in terms of cash; or
(ii) in terms of financial arrangements equivalent to cash; or
(iii) in other precisely defined terms; and
(iv) if the opinion of value is to be based on non-market financing or financ-
ing with unusual conditions or incentives, the terms of such financing
must be clearly identified and the appraiser’s opinion of their contribu-
tions to or negative influence on value must be developed by analysis
of relevant market data;
(d) identify the effective date of the appraiser’s opinions and conclusions;16
(e) identify the characteristics of the property that are relevant to the type and
definition of value and intended use of the appraisal.17 The appraisal should
contain a brief description of the company and its products as well as itemized
listings of the items appraised as described later in this book; including:
15
Introduction
(i) sufficient characteristics to establish the identity of the item including

the method of identification;
(ii) sufficient characteristics to establish the relative quality of the item (and
its component parts, where applicable) within its type;
(iii) all other physical and economic attributes with a material effect on
value;
(iv) the ownership interest to be valued;
(v) any known restrictions, encumbrances, leases, covenants, contracts,
declarations, special assessments, ordinances, or other items of a simi-
lar nature; and
(vi) any real property or intangible items that are not personal property but
which are included in the appraisal;
(f) identify any extraordinary assumptions necessary in the assignment;
(g) identify any hypothetical conditions necessary in the assignment; and
(h) determine the scope of work necessary to produce credible assignment results
in accordance with the SCOPE OF WORK RULE.18 The Scope of Work Rule
is discussed and elaborated upon later in this book.
1. The Appraisal Process as Described by USPAP Expanded

Property to Be Appraised
What is the property to be appraised?19 Also, what assets are excluded from the
appraisal? It is important to identify both included and excluded assets, because the scope
of the appraisal may not be obvious. Take, for example, a complicated appraisal subject
such as a complex industrial plant. Is land excluded? If land is included, who will appraise
it? Does the appraisal include assets at more than one location?
Purpose of Appraisal
The purpose of the appraisal is essential to the identification of any intended us-
ers of the report. Is the purpose to determine fair market value in continued use, orderly
liquidation value, or some other kind or level of value? It is essential that any intended user
of the appraisal understand the purpose.
Intended Uses of Appraisal
The intended use of an appraisal is established by the client. The client’s use may
encompass requirements of one or more other intended users. An appraiser cannot identify
the client’s intended use without having identified the client and having established a clear
understanding of the client’s requirements by communicating with the client or the client’s
agent. To avoid misunderstandings, the appraiser and client must have a mutual under-
standing of the uses of the appraisal report before the appraiser begins to work. Some of
the possible uses of an appraisal are discussed later in this chapter.
16
Introduction
Definition of Value
The different definitions of value needed by the MTS appraiser have been discussed
above. Whereas the intended use of the appraisal is determined by the client, the value defi-
nition is determined or accepted by the appraiser, after clear communication with the client
regarding the intended use and other circumstances surrounding the appraisal requirement.
Effective Date
The appraisal must be “as of” a specific date because values are constantly chang-
ing. The effective date is the date that correlates to the value conclusions, not the date when
the appraisal was started or completed (although the effective date could be either of those
dates). Sometimes a retroactive date is important, such as in inheritance tax cases (e.g., date
of death).
Limiting Conditions
A report’s “statement of limiting conditions” limits the use of an appraisal or quali-
fies its conclusions. In addition to clarifying the meaning of the report for intended users,
the limiting conditions could be important in limiting the appraiser’s liability.
2. Collect Relevant Data

List, Describe, and Classify Assets
The assets should be properly listed in a uniform and systematic manner, not only
to facilitate pricing but also to assist the client or other intended user in identifying assets.
The catch phrase “name it, size it, describe it” has been used to describe the basics of
listing. Using the client’s asset accounts and classes is often desirable, especially when the
appraiser’s work must be reconciled with the client’s accounting records. This subject is
discussed in Chapter 2.
Research Cost, Comparable Sales, and Income Data
This subject is discussed in detail in Chapters 3 through 5.
3. Apply Appropriate Valuation Methodology and Analytical Techniques

USPAP requires that the appraiser should consider all three approaches: the cost,
comparable sales, and income approaches. It is not required that all three approaches be
used, but the appraiser must consider each approach and state why those not used were
omitted. The three approaches are the subjects of Chapters 3 through 5.
4. Formulate Value (or Other) Conclusions

The appraiser’s conclusion of value (or other conclusions if the assignment is a
consulting engagement) must be clearly stated and the basis for the conclusion sufficiently
explained.
5. Prepare Appraisal Report

The appraisal report should be detailed enough to convey the “what, where, when,
and how” of the appraisal, among other things. The facts, reasoning, and methodology
used to arrive at conclusions of value should be well organized, clear, and concise and
should meet USPAP and ASA requirements. These subjects are covered in the discussions
of report writing (Chapter 8) and ethics (Chapter 10).
17
Introduction
Appraisal Purposes and Definition of Value

Appraisals of machinery, equipment, and other business assets have a wide field
of application. Appraisals are required for a variety of purposes, including allocation of
purchase price; bankruptcy; condemnation; dissolutions of marriage, partnerships, and
corporations; financing; insurance; leasing; management considerations; mergers and ac-
quisitions; partnership formation and dissolution; transfer of ownership; various types of
taxation and tax planning; and utility rate making. Each appraisal purpose requires that an
appropriate level, type, or definition of value be selected. As discussed earlier, the client
defines the intended use of the appraisal, but it is the appraiser’s responsibility to select or
accept the proper definition of value associated with the intended use of the appraisal.
The discussion that follows is general in nature and is not intended to include all the
uses for which appraisals are prepared. The experienced appraiser has probably seen virtu-
ally all definitions of value appropriately applied for virtually all purposes: for example,
allocation of purchase price based on liquidation, lease residuals based on liquidation, or
financing at market value. These examples are exceptions to the general rule. Therefore, the
following discussion is intended to provide general guidelines only of the more commonly
found situations. Whenever possible, the appraiser should seek guidance from the client’s
legal counsel or accountant with respect to the appropriate definition or level of value.
Allocation of Purchase Price

Often, entities containing multiple assets are purchased as a unit. Subsequently,
there may be a need to know the values of the separate components of the purchase in order
to set up appropriate asset records, depreciation schedules, or similar information. Depend-
ing on the purpose of the allocation (e.g., federal income tax or financial accounting), the
allocation may be based on “fair market value” under the Internal Revenue Code or “fair
value” under various accounting standards. The concept of “fair value” is discussed in
Chapter 9 and in FASB Statements and 141 (R) and 142.
Bankruptcy
A variety of value definitions may need to be addressed in bankruptcy appraisals.
In many cases, a liquidation definition is appropriate, because creditors usually prefer to
be paid in cash, not equipment. A liquidation value appraisal will frequently estimate the
likely net recovery from the compelled sale of the assets. However, bankruptcy apprais-
als can also be required to address value-in-use, value-in-exchange, liquidation value, net
realizable value, or some other value consideration as defined in various United States
bankruptcy codes. The proper definition is a function of the facts and circumstances. An
appraiser often needs to review prior court rulings or seek guidance of legal counsel to
determine the appropriate definition or level of value. The judge may impose a certain
value definition, though such a limitation isn’t common.
Condemnation
When a public agency needs to acquire private property for conversion to public
use, it exercises the power of eminent domain. Often, the property in question is industrial
or commercial in character and may contain extensive machinery and equipment. The value
definition is mandated by the law of the jurisdiction in which the taking occurs. Generally
18
Introduction
it is a variant of fair market value, such as one of the fair market value in continued use
concepts or fair market value – installed, but the appraiser should seek the guidance of
legal counsel with respect to the appropriate definition or level of value.
Dissolutions of Corporations, Partnerships, and Marriages

Appraisals for the purpose of dissolutions, whether they are marriages, partner-
ships, or corporations, are often done on a fair market value basis to establish an equitable
distribution to each spouse, partner, or stockholder. However, an appraisal for dissolution
could possibly be done on a liquidation or fair market removal value basis, particularly
if the involved parties wish to consider disposition of all assets first and then division of
the monetary results. Again, the appraiser should seek the guidance of legal counsel with
respect to the appropriate definition or level of value.
Financing
With respect to asset-based lending, when a lending institution extends credit to
a customer, the collateral that is pledged by the borrower must be appraised. Strict rules
usually govern the amount that may be borrowed and stipulate that the sum cannot exceed
a specified amount of the appraised value. To protect the lending institution and to ensure
a full recovery of the loan in the event of a default, the appraised value is often, though not
necessarily, based on a liquidation value definition—that is, what could be recovered from
the distress sale of the assets pledged to guarantee the loan. Lenders do not want the assets;
they want cash, as soon as possible. In some cases in which the borrower has an excellent
credit record and is well known in the local business community, a lending institution may
allow the loan to be based on some type of market value definition.
Insurance and Loss Settlement

The determination of insurable value is a common purpose for which appraisals
are required. Insurance appraisals are required to establish a value for insurance coverage
to indemnify the insured against loss. The insurable value is of concern to owners, lessors,
lessees, insurers, agents, and brokers.
The insurable value may be equivalent to replacement cost new if the insurance
coverage is provided on a replacement policy. More often, however, the insurable value
will be predicated on replacement cost new less depreciation or a used cost of like kind,
quality, and condition plus appropriate freight, taxes, and installation. This is often referred
to as the actual cash value.
Because many insurance policies covering industrial and commercial machinery
and equipment include a coinsurance (see Glossary for a definition of the term coinsur-
ance) clause, a good appraisal is essential to ensure financial recovery in case of loss.
An appraisal done for an insurance loss settlement has a very special and limited
purpose: to verify that asset values are in compliance with insurance policy requirements.
The values determined are the same as for an insurance appraisal. The only real difference
is that for loss settlement the appraisal is done after the loss has occurred.
Leasing
The subject of leasing is discussed in Chapter 11.
19
Introduction
Management Considerations
This catchall appraisal purpose often relates to internal financial considerations. It
is usually required by business owners. Management or owners may want to determine the
economic worth of their business, possibly by using various hypothetical assumptions as a
basis for analysis. The value definitions would depend on the client’s objectives.
Taxation
Income and other taxes are often a primary motivation for appraisals performed by
accounting firms and other independent appraisal companies. A complete discussion of the
tax-related reasons for appraisals could easily take up a chapter and is beyond the scope of
this book. However, a brief outline of several common tax scenarios that require appraisals
follows.
Taxation—Income Tax
There are many income-tax-related reasons why a client would need an appraisal.
One of the most common has already been mentioned: the buyer’s (and the seller’s) need
to allocate the purchase price when complex industrial assets have been acquired. An is-
sue that sometimes arises is whether fair market value under the tax code equates to fair
market value in continued use or some other variant of fair market value. In these and
other income-tax-related appraisals, it is essential for the lead appraiser to establish clear
communication with the client’s income tax personnel at the onset, thus ensuring that the
correct value definition is selected.
Taxation—Property Tax
Business property owners who think their personal property tax assessments may
not be fair and reasonable often hire appraisers to render an opinion of value. Depending
on the value conclusion reached, the appraisers may be retained to assist in negotiations
with local assessment officials or to provide expert witness testimony if the dispute is not
resolved through negotiation. Local law often mandates which definition of value to use.
This is generally a variant of fair market value.
Taxation—Estate and Gift Taxes, Charitable Contributions

Appraisals made for federal estate and gift tax purposes generally will be required
by tax regulations to use fair market value, the term used by the federal tax code. As
always, the appraiser should seek guidance from the client’s attorney, accountant, or tax
manager. For example, as in income-tax-related appraisals, the issue sometimes arises as to
whether fair market value under the tax code equates to fair market value in continued use
or some other variant of fair market value.
Key Points
• An appraisal is the act or process of developing an opinion of value. Value is the
monetary worth of property, goods, or services.
• Because the MTS appraiser deals with a variety of assets, most of which can be
moved, it is necessary to recognize different definitions of value. These can be
broadly classified into three categories, distinguished mainly by the asset’s antici-
20
Introduction
pated use: sale for removal for a similar or alternate use; continued use of the asset
for the purpose for which it was designed and acquired; or liquidation. Hence, the
MTS appraiser modifies or refines the words value or fair market value to create
special definitions to fit the needs of a particular appraisal. These modifiers provide
a specific definition of value to guide appraisers in their work. Nonetheless, other
definitions may prevail in certain specific instances.
• The appraiser often receives financial information about the property to be ap-
praised in which the terms price, cost, and value are used interchangeably by the
general public. Appraisers carefully distinguish between these terms. Price is the
amount a particular purchaser agrees to pay and a particular seller agrees to accept
under the circumstances surrounding their transaction. Price implies an exchange
and is an accomplished fact. The price paid for a particular asset may be higher
or lower than, or equal to, the asset’s value. The term cost is used by appraisers in
relation to production, not exchange. Cost may be either an accomplished fact or a
current estimate. It is defined as the total dollar expenditure for any asset. The cost
of a particular asset may be higher than, lower than, or equal to the asset’s value.
• Three approaches to value are generally recognized: the cost, sales comparison,
and income approaches. These approaches are widely accepted by financial institu-
tions, courts, government agencies, business, and society in general. The valuation
circumstances involving a particular asset may not allow the application and cor-
relation of all three approaches to value. USPAP merely requires the appraiser to
consider all three approaches to value and decide which approaches are applicable
to the situation at hand.
• Depreciation is another term that appraisers use in a different way than accountants
and the general public. The valuation concept of depreciation is different from the
accounting concept of depreciation. Depreciation for valuation purposes may be
thought of as the estimated loss in value of an asset compared with a new asset.
This value inferiority may be caused by a combination of physical deterioration,
functional obsolescence, and economic (or external) obsolescence. Accounting de-
preciation, on the other hand, is a process of cost allocation only. It is not a method
of valuation.
• The valuation process is a systematic procedure used by appraisers to provide an-
swers to their clients’ questions about value and value-related issues. The goal of
the valuation process is to produce a well-supported opinion of value that shows
the appraiser has considered all factors that materially affect the value of the assets
being appraised.
• Appraisals of machinery, equipment, and other business assets are required for a
variety of purposes, including allocation of purchase price; bankruptcy; condem-
nation; dissolutions of marriage, partnerships, and corporations; financing; insur-
ance; leasing; management considerations; mergers and acquisitions; partnership
formation; transfer of ownership; and various types of taxation and tax planning.
Each appraisal purpose or intended use requires that an appropriate level, type, or
definition of value be selected. The client defines the intended use of the appraisal,
21
Introduction
but it is the appraiser’s responsibility to select the proper definition of value associ-
ated with the intended use of the appraisal. It is essential that the appraiser seek
guidance from the client’s attorney, accountant, or tax manager with respect to the
appropriate definition of value before beginning the appraisal.
Additional Reading
The Appraisal of Real Estate. 13th ed. Appraisal Institute, 550 West Van Buren, Chicago,
IL 60607, 1996.
Babcock, Henry A., FASA. Appraisal Principles and Procedures. Washington, DC: Ameri-
can Society of Appraisers, 1989.
Bonbright, James C. The Valuation of Property. New York: McGraw-Hill, 1965.
Notes
1
Uniform Standards of Professional Appraisal Practice (USPAP), Definitions, 2010-2011 Edition, Effective January 1, 2010, through
December 31, 2011, p. U1. Appraisal Standards Board. The Appraisal Foundation, 1155 15th Street NW, Suite 1111, Washington, DC.
2
The Dictionary of Real Estate Appraisal (DREA), 2nd ed., p. 318. American Institute of Real Estate Appraisers, Chicago, 1989.
3
Principles of Appraisal Practice and Code of Ethics, American Society of Appraisers, Washington, DC. Jan. 1994, p. 3. Language not
applicable to the subject at hand has been edited out.
4
The appraisal of “certain other business assets” is referred to in this book as “technical specialties.” See Chapter 16 for more information
on technical specialties.
5
Uniform Standards of Professional Appraisal Practice (USPAP), Definitions, 2010-2011 Edition, p. U-1. Appraisal Standards Board.
The Appraisal Foundation, Washington, DC.
6
The term auction usually refers to forced liquidation value, but there are exceptions to this general rule; for example, in certain
industries, an auction is the standard industry method for disposing of assets, in which case it may be equal to orderly liquidation value,
assuming a normal exposure time (and may be equal to fair market value under certain conditions). The essential difference between
orderly liquidation value and forced liquidation value is one of exposure time.
7
DREA, p. 234.
8
The Appraisal of Real Estate (ARE), p. 21. 13th ed., Appraisal Institute, 550 West Van Buren, Chicago, IL 60607, 2008.
9
ARE, p. 19.
10
DREA, p. 72.
For an alternative viewpoint, see Henry A. Babcock, Appraisal Principles and Procedures (Washington, DC.: American Society of
11
Appraisers).
12
ARE, p. 336; James C. Bonbright, The Valuation of Property (New York:McGraw-Hill, 1965), p. 157.
13
Eugene L. Grant and Paul T. Norton, Jr. Depreciation (New York: The Ronald Press Company, 1955), 2010-2011 Edition, p. 269.
14
See USPAP Statement on Appraisal Standards No. 9, Identification of Intended Use and Intended Users, 2010-2011 Edition, p. U-93.
15
See USPAP Statement on Appraisal Standards No. 9, Identification of Intended Use and Intended Users, 2010-2011 Edition, p U-93.
See USPAP Statement on Appraisal Standards No. 3, Retrospective Value Opinions, 2010-2011 Edition, p. U-84, and Statement on
16
Appraisal Standards No. 4, Prospective Value Opinions, p. U-86.

17
See USPAP Advisory Opinion 2, Inspection of Subject Property, 2010-2011 Edition, p. U-82.
See USPAP Advisory Opinion 28, Scope of Work Decision, Performance, and Disclosure, 2010-2011 Edition, p. A-95, and Advisory
18
Opinion 29, An Acceptable Scope of Work, p. A-99.

19
Throughout this book, the property to be appraised is often referred to as the “subject property.”
22
2
Classification and Description of
Machinery and Equipment
Objectives:
1. Define appraisal accounts and classes.
2. List typical machinery and equipment classes.
3. Explain the process of listing and describing machinery and equipment.
4. Discuss sampling and desktop techniques.
Experienced MTS appraisers are professional fact and data collectors. They are
keen observers and resourceful investigators who are not likely to be intimidated by an
occasional lack of precise knowledge of the process or machines they are called upon to
appraise. They know that if their classifications and descriptions of the subject property are
good, they will have the information they need to perform the required valuation research
and reach supportable conclusions of value.1
Chapter 2 discusses the classification and description (often called listing) of ma-
chinery and equipment. With a few exceptions, the basic techniques for classifying and
describing assets are similar whether the appraiser is valuing an entire plant or a single
2
machine and regardless of the industry or process being appraised. This chapter also dis-
cusses the listing of entire factories like steel mills as well as of single machines. Large
steel mills, where production is often influenced by global developments, are usually self-
contained units. A complete steel mill may have a railroad, a power generation plant, power
distribution lines, water treatment facilities, quality control laboratories, production facili-
ties, research facilities, material handling equipment, and administrative offices. Despite
this wide array of assets, the appraiser uses the same basic classification and description
methods to list the assets of the steel mill that the appraiser would use to list the assets of a
single milling machine or aircraft.
Individual appraisers have various styles of assembling information. Listing a mas-
sive process plant can be relatively simple if approached in an organized manner. Simplifi-
cation is a major concern to the appraiser, plant owner, and, if one is involved, the lender.
Of course, simplification is no excuse for insufficient detail while the other extreme in
description is verbosity. Seasoned appraisers learn from training and actual experience
what information should be recorded to accomplish their objectives.3
23
Classification and Description of Machinery and Equipment
Before listing the assets, it is worth reviewing the extent of the engagement. An
important consideration is the scope of the appraisal work: are you appraising the entire
plant, only a specific portion of the plant (e.g., a process line), or individual machines?4
Looking at the flowline in Figure 2.1, note how the illustration has simplified a
complex process into small visuals. Equipment or process descriptions, like graphic visu-
als, are important to the appraiser and client. For example, captions at the left-hand corner
read “Iron Ore” with the flow toward “Pellets.” Intuitively one recognizes that the iron
ore and pellets receive more processing than the figure illustrates. The appraiser also un-
derstands, without a long explanation, the intrinsic value of the machinery and knows that
a business enterprise developed the engineering, assembled the labor, found the iron ore
deposit, purchased the machines to mine the deposit, transported the ore, and processed it
in other machines to get to the next step of pelletizing. Whenever a manufacturer produces
material, moves the product, processes the product, handles the product, or in any way
changes the product, it is adding value to the product. If the product has value through
each stage of processing, then the machinery that processes and adds value must also have
value. Each stage in the handling and changing of the product is a small plant or system.
Each component requires an initial purchase and turnkey costs, such as freight and instal-
lation, to make the machine a producer.
Figure 2.1. Flowline of steelmaking. Courtesy of the American Iron and Steel Institute.
Referring again to the visual aspect of description, the experienced appraiser will
think of a manufacturing plant as a group of individual items brought together and as-
sembled to generate a financial return. As the appraiser inspects and lists each machine, it
is considered a visual; that is, the very fact that the machine can be seen says something
about its use, capacity, and relationship to other machinery in the area. After developing
an overview of the facility, the appraiser’s next task is to find, identify, classify, describe,
and ultimately value each component relative to its physical and economic condition and
its market supply and demand.
24
Accounts and Classes

A standardized group of appraisal accounts and classes promotes uniformity and
consistency. For appraisal purposes, accounts are major groupings of assets that are similar
in character. The most basic separation of tangible assets into accounts would be land,
buildings (or structures), and equipment (including machinery and furniture, although
some would classify furniture as a separate account).5
The equipment account can be broken down further into various classes, such as
production machinery, general plant equipment, office furniture and fixtures, and other
classes (described in the next section). Using the client’s accounts and classes is often
desirable, especially when the appraiser’s work must often be reconciled to the client’s
accounting records. In such cases, the client’s equipment classes may differ from those
described in the following text, although they will probably be similar.
Typical Machinery and Equipment Classes

Production Machinery
Production machinery is usually the appraiser’s primary concern because it usu-
ally represents a relatively large percentage of the total value of a plant (see Figure 2.2).
Anything other than the main production machinery or process is peripheral to, and in sup-
port of, the operation. For example, the main part of a cement manufacturing plant is the
lime kiln. The electrical motor control center (MCC) is a support item (of course, without
the MCC the kiln and the entire plant are inoperable). It is essential for the appraiser to
understand the manufacturing process. Although industry research is not discussed in this
chapter, we will assume that the appraiser, starting a new and unfamiliar plant evaluation,
will have researched the process through library or industry sources. At the very least, the
appraiser should review the process with the appropriate plant personnel before beginning
the listing process.
Figure 2.2. Deckel Maho DMC63H horizontal machining center with Siemans Sinumerck 870D CNC
controls, 30 HP, CNC controls, 30 HP, 20,000 RPM 15.74” wide × 19.69” long pallet.
25
Support Equipment
Machinery that maintains or increases the ability and capacity of the production
equipment is support equipment (see Figure 2.3). For example, most plastic injection
molding machines have a scrap grinder associated with them. The injection machine can
process plastic without the grinder, but the injection process is less efficient. The scrap
grinder grinds or cuts the excess plastic for reuse.
Figure 2.3. Support equipment – Sterling Maverick Series Granulator.
Motor Control Centers and Switchgear

Motor control centers and switchgear are often referred to by the acronym MCC.
Unless the plant has main electrical substations, the MCC is usually the largest electrical
distribution center in the plant. The MCC is electrically fed by transformers, usually out-
side the building, which in turn are fed by high-power lines or substations. There may be
MCCs for each area, or one MCC may control the electrical power for the entire plant. The
MCC can vary from a few wall-mounted main switches to a major installation including a
separate air-conditioned enclosure (see Figure 2.4). Primary electrical voltage is measured
in volts, amperes, and watts.
26
Figure 2.4. Motor control center.
Electrical current is either alternating current (AC) or direct current (DC). The
most common industrial electricity is AC, which is cycled as either 50 or 60 hertz. Power
required for machines is measured in horsepower (HP) or kilowatt (kW). Electrical cur-
rent is measured in amperes (amps). Industrial power is usually referred to as three-phase.
Most equipment under 1 HP is run on single-phase electricity. Transformed voltages to the
industrial motors are often 208–230/460 volts AC (in Canada, 550 volts AC). Exceptions
occur, depending on the motor manufacturer specifications and the available utility service.
In some countries, including much of Europe, transformed electricity may be 380 volts.
Despite the differences in voltage and hertz, it is not unusual to find mixed voltages in the
same plant. The uncommon voltage will have been transformed, rectified to the plant’s
incoming power, or run in an alternate hertz.
MCC areas can be deceptive in that the single-phase power may be installed in the
same area as the plant’s three-phase power. Although single-phase power is used to run
small equipment, usually less than 1 horsepower (HP), it is often considered part of the
wiring of the building. Therefore, much of the single-phase power may not be considered
machinery unless the processing or manufacturing equipment is single-phase power. For
example, laboratories, medical offices, electronics, and small manufacturing lines use ex-
tensive single-phase power of less than 1 HP.
It is important to consider the MCC when appraising the plant as a whole or apprais-
ing under some form of fair market value in continued use or fair market value-installed.
The MCC may have less relevance in estimating a distressed sale value when the equip-
ment is to be removed.
27
Power Wiring
The plant power wiring connects the plant equipment to the MCC. The equipment
is strung together with wiring, controls, and switches. If the appraisal requires a listing of
the power wiring, the appraiser will estimate the size, number of linear feet of conduit and
wire, number of motors, supply boxes, and switching between the equipment and the MCC.
Process Piping
Many plants require compressed air, water, steam, gases, or fluids for heat process-
ing or cooling. For example, papermaking, textile dyeing, and ore processing require large
amounts of water. Process piping (see Figures 2.5 and 2.6) can include piping, valves,
fittings, pumps, and process controls, among others, and is important in appraisals for fair
market value in continued use or fair market value-installed but less important in liquida-
tion appraisals.
Figure 2.5. Process piping
Figure 2.6. Process piping.
28
Foundations and Structural Supports

A valuation under a fair market value in continued use and fair market value-in-
stalled premise generally requires that the appraiser include associated costs for equipment
installation. Some massive machinery requires special pits or heavy foundations (see Figure
2.7). Installed machinery may require structural steel, catwalks, ladders, or platforms. The
appraiser may or may not include these related structures, again depending on the scope of
the assignment. For example, in North America, most insurance-related appraisals would
not include anything below the lowest concrete floor of the plant. On the other hand, an
appraisal for allocation of purchase price may require the inclusion of all the costs required
to bring a machine into production. Regularly published guides and books will aid in the
description and pricing of these items. Some of these guides will be discussed later in the
text.
Figure 2.7. A process facility installation with foundations and structural supports.
Material Handling and Storage Equipment

Plant production depends on moving materials through the plant, from raw material
receiving to material processing, product finishing, and inventory. This is accomplished
with material handling equipment such as forklifts, loaders, conveyors, cranes, hoists, pal-
let movers, programmable inventory systems, and the like.
General Plant Equipment
General plant equipment usually includes mainly lower unit-cost items necessary
for the operation of the plant, such as plant furniture and fixtures (located in manufactur-
ing instead of office areas), benches, racks, lockers, scales, hand trucks, time recorders,
ladders, fire extinguishers, and similar assets. Although these may be the lower unit-cost
items, the appraiser should not ignore them because in aggregate they may amount to
significant value.
29
Rolling Stock
Some appraisers break rolling stock into its two subclasses: plant vehicles and li-
censed vehicles. The term plant vehicles usually includes trucks, cranes, tractors, and other
mobile equipment not licensed for road use. (See Figure 2.8.) The term licensed vehicles
usually includes automobiles, trucks, tractors, trailers, and other vehicles licensed for road
use. (See Figure 2.9.) Depending on the type of operation, mobile equipment can be of
great or little consequence. For example, in mining operations, the mobile equipment is
generally a significant portion of the total value. Most manufacturing plants have delivery
trucks and some automobiles. Construction companies use material-handling trailers, load-
ers, tractors, and other mobile equipment. Some appraisals may be limited to the rolling
stock itself.
Figure 2.8. An example of plant vehicles.
Figure 2.9. An example of licensed vehicles.
30
Laboratory and Test Equipment

Laboratory and test equipment include items necessary for the operation of a labo-
ratory or test facility. Typical equipment would include microscopes, clean tables, fume
hoods, ventilating systems, spectrographs, ovens, stills, glassware, and similar assets.
Office Furniture, Fixtures, and Equipment
The appraisal may include office furniture, fixtures, and equipment. This class
includes desks, tables, chairs, credenzas, filing cabinets, portable partitions, calculators,
copy machines, fax machines, office machines, typewriters and similar assets. Computers,
including support items such as printers, plotters, modems, scanners, and similar assets,
may be included in this class, or they sometimes may be included in a separate class (see
the following section). It may also include computer-aided design (CAD) and computer-
aided manufacturing assets that support manufacturing operations. Many manufacturing
systems are hard-wired between the engineering, accounting, and the manufacturing areas.
Office systems are often networked between personal computers and fileservers. Facilities
are often connected to the Internet or other communications systems. An appraiser may
be asked to value not only the hardware but sometimes the software associated with these
systems.
Some clients only want items listed that have value over a certain amount, with as-
sets under a specified value being aggregated. The appraiser must use caution in these situa-
tions so that the client’s requests do not cause the appraisal to be inaccurate and misleading.
Tools
This class is often divided into two subclasses: permanent and perishable. Perma-
nent tools include portable electric and air tools, anvils, vises, gauges, chucks, and similar
items. Perishable tools include items that are consumed within a relatively short period,
such as drills, chisels, reamers, taps, and other assets.
Special Tooling
This class is sometimes called tools, dies, jigs, and fixtures. It includes apparatuses
used in conjunction with production equipment and built for specific operations or applica-
tions. Items in this category include dies, jigs, fixtures, molds, patterns, templates, and
similar assets.
Construction in Progress
Construction in progress includes projects under construction that are being capital-
ized on the owner’s records but that have not been completed as of the effective date of the
appraisal.
Special Classes
Appraisals for certain industries may require additional classes, such as aircraft,
bottles and cases (beverage industry), screens (printing), cores and molds (foundry), and
trays and pans (bakery). At other times, it may be necessary to augment the aforementioned
classes to account for the following situations:
• Leased machinery and equipment: It is common to find leased machinery
and equipment used in combination with the company’s owned assets. Leases
may include all sorts of machinery and equipment from individual items to
31
entire manufacturing lines. The appraiser should identify any leased equip-
ment and the appraisal report should explain how the appraiser relied on the
client’s representations regarding leased equipment and what action the ap-
praiser took relative to leased items.
• Not inspected or away from premises: This situation refers to assets that were
not inspected for a valid reason. For example, if assets are located in a remote
or hazardous area, it might be reasonable to rely on the client’s information
regarding description, condition, and so forth. The appraisal report should
clearly explain how the appraiser accounted for these assets.
• Nonoperating assets: This situation refers to assets that are extraneous to
business operations in the sense that they do not contribute to the earning
capacity of the business entity. These assets are often held for purposes of
investment, subsequent disposal as surplus property, or other reasons.
Inventories
Often, the appraiser will not be required to appraise inventories. However, there
are appraisers who specialize in the valuation of inventory. Inventories are typically ap-
praised in connection with factoring or some type of loan (such as a revolver loan) and
they are sometimes appraised when a purchase price needs to be allocated. The appraisal of
inventories is discussed further in Chapter 12. In manufacturing, inventories can generally
include raw materials, work-in-process, finished goods, and dead stock.
Identification and Listing of Machinery and Equipment

There are two major procedures in the identification and listing of machinery: mac-
roidentification and microidentification.6
Macroidentification
Macroidentification studies the entire manufacturing process by identifying major
components contributing to the design capacity of the plant.7 Macroidentification is the
method the appraiser uses to answer these questions: (1) What does the plant produce? (2)
How is the product produced? (3) What is the capacity of the plant?8
Some of the information to be considered when gathering the data for macroidenti-
fication of machinery and equipment is provided below:
• Date
• Company name and address
• Source of information
• Products produced (with each process name and description)
• Engineering design firm and contractor
• Original date of construction and expansions
• Plant or process byproducts, amounts, and uses
• Plant or unit capacity per day or per year (tons per day, gallons per day, barrels
per day, annual production, etc.)
32
• Plant capacities: design capacity; rated and actual consistent capacity

• Plant efficiency or obsolescence
• Yield or losses and reason for losses
• Feedstocks and sources
• Operating mode (days per month) if not identified in capacity (e.g., sugar beet
plants that run seasonally)
• Outlets for finished or intermediate products
• Plant sales outside the parent company for use in other company plants, or
other product sales possibilities
• Available historical operational data over three–five years
• Fuel and power consumption by unit
• Operating staff per unit
• Type of control systems and if the control is centralized
• Estimated maintenance budgets over the past three–five years and projected
budget if plant is operational
• Identification of equipment requiring extraordinary maintenance, with rea-
sons given
• Maintenance program implementation (i.e., regular, preventive, or demand)
• Plant layout: Is the flow considered adequate, manageable, etc.?
• General condition of plant and components
• Age: chronological, effective, and estimated equipment and product remain-
ing useful life
• Status of safety and environmental standards: Are they good, and if not, can
they be upgraded, and at what cost?
• Pollution control equipment in place
• Support facilities
• Obvious detrimental factors9
Obviously, not all of these items apply to all appraisals, and the appraiser should
exercise judgment regarding the information that needs to be obtained.
Figure 2.10 illustrates an abbreviated example of the type of information that may
be pertinent in the macroidentification process. The depth of investigation is contingent
on the scope of the appraisal, that is, whether the appraisal is for a group of machines, a
technical process, or a system.
33
Figure 2.10. Manufacturing process for iron and steel10.
One of the most important items the appraiser identifies is the capacity of the sub-
ject. That is, what was the line designed to process, what is its designed or rated output, and
what is the current or actual output? For example, an appraiser might include the following
information in his or her description of the coil line shown in Figure 2.10.
General Description
A steel coil to sheet line for the production of 126” wide × 1” thick mild carbon
steel and hot-strip low-alloy steel at 100,000 psi tensile strength and 75,000 lb. yield.
Coil Size
Maximum weight: 100,000 lb.
Inside diameter: 30”
Width: 43” to 126”
Thickness: 3/16” to 1”
Pounds per inch of width: 250 lb. to 1,500 lb.
Coil temperature: –10ºF to 110ºF
Speeds: 0 to 250 feet per minute (FPM);
250 FPM maximum for mild steel to
0.500” and up to150 FPM for heavier
gauges up to 1.000”.
This kind of information may be obtained from the plant engineer or from
process drawings. On the other hand, if the appraisal is of a small shop or other
process where there is not much data, it may be necessary to interview manage-
ment to obtain the information. The primary focus is to find out what the plant
manufactures, how much, and over what period. Once these questions have been
answered, the machinery and peripheral equipment can be listed accordingly.
Microidentification
Microidentification is the process of finding the individual characteristics of the
equipment; it focuses on the listing of a single machine and identifies the specifics of the
34
equipment. Of prime importance in microidentification is the brand name, model number,

serial number, type of power, and dimensions (if practical):11
• Brand name. The brand name or manufacturer may be the only identification
that can be found. Occasionally, there will be no identification because the
nameplate is missing or cannot be read.
• Model number and size. The model number and size may be the same, or the
model number may have no relationship to size, but merely represents the
manufacturer’s cataloging number.
• Serial number. The serial number can be an extremely important piece of
information. Given a serial number, a call to the manufacturer might result in
the determination of the year of manufacture, capacity, size, and sometimes
even the original owner. For some machinery, such as machine tools and
construction equipment, the data are so useful that serial number guides are
regularly published.
• Capacity. Capacity is often identified in the size of a machine. For example, a
backhoe tractor-loader is often measured by how many yards or cubic meters
it can dig; a crane is measured by the number of tons it can effectively lift;
and a milling machine is measured by the horsepower or kilowatts and the
work table size.
• Physical size. Sometimes it is useful to measure the physical size or footprint
of the equipment—for example, the length of a conveyor, the diameter and
height of a tank, or the span and travel of a crane.
• Age and condition. Chronological age can often be obtained from the manu-
facturer’s plate or serial number. Condition is a subjective observation about
the physical appearance, and sometimes the operating performance, of the
machine.
Figure 2.11. Vertical machining center.
35
The following is an example of how an appraiser might record microidentification

information for the vertical machining center shown in Figure 2.11:
Item: Vertical Machining Center

Manufacturer: MAG Fadal
Model: VMC3016FX
Serial number: 32017
Spindle speed: 8,000 RPM to 15,000 RPM
Controls: Fadal MP CNC
Envelope: 30” × 16” × 20”
Manufactured: 2007
Condition: Good
For a fair market value in continued use or fair market value-installed appraisal,
the appraiser normally includes several other items in the description, such as foundations,
structural supports, wiring, and switches. These items are usually excluded if the appraisal
is for fair market value or for orderly or forced liquidation unless it is a liquidation value
in place.
During the initial inspection of the assets, it is important to record as much detail as
reasonably possible. As an appraiser’s experience grows, so does his or her ease in gather-
ing data. Since information can always be refined after the appraiser has all the facts, it is
usually better to err on the side of collecting too much detail. However, there is a point at
which additional detail may be superfluous or even counterproductive so the collection of
unnecessary details should be avoided. Listing essential information such as manufacturer,
model number, serial number, capacity, and condition usually provides sufficient informa-
tion to complete the necessary valuation research.
Given that individual machines are usually components of larger processes, another
method of quick microidentification is to list the entire line as a plant component. Take, for
example, a complete fluid milk pasteurizing line. Typically, these processes include a feed
storage tank, a homogenizer, a high-temperature-short-time pasteurizer, holding tubes, bal-
ance tank, pumps, controls, valves, and sanitary product transfer tubing. One way to appraise
this line would be component by component. However, the appraiser could also identify
and appraise the same process by capacity. By using capacity as a basis, the milk plant can
be measured in pounds per day or in gallons per hour. On the basis of this information, an
appraiser could use engineering data to identify the equipment and price the components.
Similarly, other types of plants, such as cement plants, certain mining operations, and some
steel production facilities, can be valued by units of production. Sometimes, the unit cost
method is the most practical method of identification and valuation, especially when there
are ample industry data to support its use. With proper statistical support, this method can
be used for technical valuation in property tax matters, business analysis, public utility
studies, right-of-way, and public domain cases.
36
Identification Through Sampling or Other Abbreviated Analysis Methods

Sampling
Sampling is a valuation technique that may be used to appraise large amounts of
tangible assets without actually inspecting every item. The sampling process might check
one of a dozen items, 10 percent of the total equipment cost, or several assets in each
equipment class. Sampling is generally appropriate only when an accurate reflection of
the whole can be inferred from the sample. The problem with sampling is that appraisers
do not see everything and must make certain assumptions regarding the assets they have
not seen. Before using the sampling technique, the appraiser should explain to the client
the limitations of this form of appraisal, obtain the client’s agreement to use the method,
properly disclose the method in the appraisal report, and satisfy any other requirements
of USPAP. Some methods for using sampling techniques are explained in greater detail in
Chapter 7, Appraising Assets in Groups.
Other Abbreviated Analysis Methods
Another identification method is sometimes called the examination or audit meth-
od. This analysis methodology identifies and values assets without inspecting and listing
them, by relying on documents and other information provided by the client or others.
This method can sometimes be useful when there are large amounts of similar equipment
in multiple locations and little time to complete the appraisal. However, it should be re-
membered that when using sampling and abbreviated techniques the appraiser must be
very careful to ensure that the appraisal effort complies with all applicable performance
standards and ethical requirements. Additionally, the appraiser must be satisfied that the
use of these abbreviated methods does not result in a false or misleading appraisal.
Key Points
• Experienced machinery and equipment appraisers are professional fact and data
collectors. They are keen observers and resourceful investigators who are not likely
to be intimidated by an occasional lack of precise knowledge of the process or
machines they are called upon to appraise. They know that if their classifications
and descriptions of the subject property are good, they will have the information
they need to perform the required valuation research and reach supportable conclu-
sions of value. For appraisal purposes, accounts are major groupings of assets that
are similar in character. The most basic separation of tangible assets into accounts
would be land, buildings (or structures), and equipment.
• The appraiser breaks the equipment account down into various classes. Typical
equipment classes are production machinery; support equipment; motor control
centers and switchgear; power wiring; process piping; foundations and structural
supports; material handling and storage equipment; general plant equipment; plant
and motor vehicles; laboratory and test equipment; office furniture, fixtures, and
equipment; computer equipment; tools; special tooling; patterns and templates;
construction in progress; special classes; and inventory.
• Two major procedures in the identification and listing of machinery are macroi-
dentification and microidentification. Macroidentification is the study of the entire
manufacturing process by identifying major components contributing to the design
37
capacity of the plant. Microidentification is the process of finding the individual

characteristics of the equipment; it focuses on the listing of individual machines
and identifies the specifics of the equipment. Of prime importance in microiden-
tification are the brand name, model number, serial number, type of power, and
dimensions (if practical).
• The appraiser should remember that when using sampling and abbreviated tech-
niques he must be very careful to ensure that the appraisal effort complies with all
applicable performance standards and ethical requirements and the appraiser must
be satisfied that the use of these abbreviated methods does not result in a false or
misleading appraisal.
Additional Reading
Meade, William, P. E. (ed.). Encyclopedia of Chemical Process Equipment. Reinhold, New
York., 1964.
Merkel, James A., Ph.D. Basic Engineering Principles, 2d ed. AVI Publishing, Westport,
Conn., 1983.
Perry, J. H., C. H. Chilton, and S. D. Kirkpatrick. Perry’s Chemical Engineer’s Handbook,
4th ed. McGraw-Hill, New York, 1963.
Viale, J. David. Basics of Manufacturing: Fundamental Concepts for Decision Makers.
Von Hoffman Graphics Inc., 1995 ISBN: 1-560523-03-1.
Collier, Courtland A. Engineering Economic and Cost Analysis, 3d ed. Prentice Hall, Up-
per Saddle River, N.J. 1998 ISBN: 0-673983-94-3.
Smith, Gerald W. Engineering Economy. The Iowa State Press (Blackwell Publishing Pro-
fessional), 2121 State Ave., Ames, IA 50014-8300, www.blackwellprofessional.com.
Notes
1
Alan C. Iannacito, “Identification of Machinery and Equipment,” in Appraising Machinery and Equipment (Washington, DC: American
Society of Appraisers, 1989), p. 27 with minor revisions and updates that were incorporated by the editors for purposes of this 2010
publication.
2
Ibid., p. 17.
3
Ibid., p. 18.
4
Ibid., p. 17.
5
Skousen, K. Fred; Harold Q. Langenderfer; and W. Steve Albrecht, Financial Accounting, 4th ed. (Cincinnati, OH: South-Western
Publishing Co., 1991), p. 314.
6
Iannacito, “Identification of Machinery and Equipment,” pp. 18–26.
7
Ibid., p. 18.
8
Ibid., pp. 21–22.
9
Ibid., pp. 22–23.
10
Ibid, pp. 18–26.
11
Ibid, p. 23.
38
3
Cost Approach
Objectives:
1. Introduce the cost approach and principle of substitution.
2. Distinguish between replacement and reproduction cost.
3. Describe methods of determining cost new.
4. Discuss concepts of depreciation, including obsolescence.
5. Illustrate the cost approach methodology with examples.
Using the cost approach, the appraiser starts with the current replacement or re-
production cost new of the property being appraised and then deducts for the loss in value
caused by physical deterioration, functional obsolescence, and economic obsolescence.
The logic behind the cost approach is the principle of substitution: a prudent buyer will
not pay more for a property than the cost of acquiring a substitute property of equivalent
utility.1 The principle can be applied either to an individual asset or to an entire facility.
In its simplest form, the cost approach is the current cost (as if new) less all forms of
depreciation. The appraiser identifies the property being appraised (“subject”), develops its
current replacement or reproduction cost new, and subtracts all depreciation that makes it
less desirable to own than if it were new or any other factors that may make it less desirable
to own.
Determination of Current Cost New

Replacement and Reproduction Cost
The replacement cost new is generally the proper starting point for developing an
opinion of value using the cost approach.2 It is essential that the appraiser understand the
difference between replacement cost new and reproduction cost new.3 Replacement cost
is the current cost of a similar new property having the nearest equivalent utility as the
property being appraised, whereas reproduction cost is the current cost of reproducing a
new replica of the property being appraised using the same, or closely similar, materials.
In using the cost approach, the appraiser is comparing to the subject property the
property that could actually replace it. The replacement property would be the most eco-
nomical new property that could replace the service provided by the subject.4 As Professor
James Bonbright states in The Valuation of Property:
“Most physical properties are not replaced by properties of the same size,
design, and materials. They are replaced by materially different properties
of a more modern type, better designed to meet the owner’s present needs....
39
Cost Approach
[T]he replacement would be one of substitution [i.e., replacement cost] rather

than identical reproduction.... In such cases, the hypothesis that the value
of the existing property is derivable from the current cost of constructing
or buying a substantially identical property [reproduction cost] is always
invalid. The appraiser may still adhere to it [reproduction cost] if he believes
that there is no material difference between the cost and efficiency of the
different substitute [replacement cost] and the cost and efficiency of the
replica [reproduction cost]. But he cannot ignore the discrepancy if it is
serious—otherwise he will be guilty of gross overvaluation.”5
Professor Eugene Grant makes the same point: “[I]f replacement with a different
substitute asset would be more economical, the cost of reproducing identically an existing
old asset has no bearing on value.”6
Whether the subject asset is an individual item of equipment or an entire plant,
improvements in design, product flow, processing methods, layout, and equipment size
and mix make the modern substitute more desirable to own. The substitute, or replacement
property, will be more desirable to own because it is superior to the subject in one or more
of the following respects: it costs less to acquire (capital cost advantage), costs less to oper-
ate (operating cost advantage), or produces more revenue (profit advantage).
Although replacement cost is the proper starting point in the cost approach, this
does not preclude development of reproduction cost for some purposes. Reproduction cost
can be developed to quantify one form of functional obsolescence: that due to excess capi-
tal costs. Assuming that a property’s replacement cost is less than its reproduction cost,7
excess capital cost is measured by the difference between reproduction and replacement
cost. This excess cost represents the lower capital investment required to obtain the most
economical new asset to perform the same service as the subject.
Reproduction cost can also be estimated when an appraisal is to be compared with
other value indicators developed by trending, so that there will be an equal basis of com-
parison (i.e., an “apples to apples” comparison). In addition, if the subject asset would
actually be replaced with a replica, there is no difference between replacement and repro-
duction cost and, hence, there is no harm in referring to the starting point as reproduction
cost new (although the term replacement cost new would also be correct). The difference
between replacement and reproduction cost has been discussed above in theoretical or
definitional terms. The following example applies the theory to a hypothetical set of facts.
Example 1: Replacement or reproduction cost estimated by using the proper

level of current cost as the starting point.
The task is to appraise only the steam generation facilities of a 50,000-bar-

rel-per-day petrochemical refinery. After a plant wide tour the appraiser
ascertains that the steam generated is for process use only. A meeting with
the plant’s boiler superintendent establishes that there are four boilers and
the superintendent provides the information presented in Table 3.1.
40
Cost Approach
Rated Capacity Chronological Age

Boiler Number (Pound Per Hour) in Years Furnace Type
1 15,000 46 Brick-set oil fired
2 30,000 36 Field erected oil-fired
3 30,000 10 Package oil-fired
4 60,000 6 Package oil-fired
Total 135,000
Table 3.1. Example 1 information.
Other Information:
Boiler 1 is still capable of operating, but it has been considered excess since boiler 4
began operation 6 years ago. Boiler 1 has not operated since boiler 4 was installed.
Boiler 2 is a “swing” boiler and runs only occasionally during peak periods.
Boiler 3 operates in conjunction with boiler 4 and usually operates at or near

capacity.
Boiler 4 runs continuously, which maximizes its use.
Peak periods are midsummer and midwinter.
a. Peak demand in summer is 100,000 pounds per hour.

b. Peak demand in winter is 90,000 pounds per hour.
The client has recently built a modern refinery of equal capacity to the subject
in a neighboring state. The manager of that refinery provides the following
characteristics (cost, design, engineering, technology, construction materials, etc.)
of the newer modern facility that would, hypothetically, replace the subject facility.
• The new refinery is of equal capacity (i.e., 50,000 barrels per day).
• Construction of the new plant was completed three years ago.
• The new plant uses heat recovery on the process units to reduce plant-
generated steam; consequently, peak demands in summer and winter have
virtually been eliminated in the new plant (the subject refinery does not have
a heat recovery system).
• The new plant has two 40,000-pounds-per-hour package-type boilers, oil
fired, for a total rated capacity of 80,000 pounds per hour.
• The historical cost of the new refinery’s boilers, including all peripherals,
was $1,500,000 (3 years ago).
The question in this example is “What is the appropriate current cost new to be
used in the cost approach?” Assume the following: The purpose of the appraisal is
for property tax purposes to determine whether the assessed value placed on the
property by the local assessor is fair and reasonable; the premise of value is fair
41
Cost Approach
market value installed according to the state tax code; all costs are midyear; and
the trend factor is 10%8 per year.
Begin by analyzing the available facts. Given that the company just built a new
refinery, you have the basis for establishing the replacement cost new for the
entire refinery, and specifically, the steam generation facilities. (Assume that
the feedstock and product mix of the new and subject facilities are the same.)
When you look at the subject boilers, you see a number of areas of obsolescence.
Boiler 1 is brick-set/oil-fired and represents excess construction. Although it is not
mentioned specifically, it would be logical to assume that the use of heat recovery
on the refinery process units represents an advance in technology resulting
in reduced steam requirements. The subject plant has a total steam capacity of
135,000 pounds per hour, while the new plant has a total of 80,000 pounds per
hour, reflecting excess capacity in the subject plant. Since a prudent purchaser
would pay no more than the cost of acquiring the most economical new asset that
could replace the service provided by the subject, the appropriate current cost
would be the cost of two 40,000-pounds-per-hour package-type, oil-fired boilers.
That cost would be calculated by multiplying the historical cost (three years ago)
of $1,500,000 by a trend factor of 1.331 (1.10 × 1.10 × 1.10) to bring the historical
cost of the modern replacement asset to the current date; thus, $1,500,000 × 1.331
= $1,996,500. Therefore, in this example, the proper level of current cost would
be a replacement cost new of $1,996,500.
Although the reproduction cost new of the four subject boilers will not be
calculated here, it should be noted that the replacement cost of $1,996,500 for the
modern replacement asset is significantly less than the reproduction cost of the
four existing boilers of varying sizes and types.
In this example, the issue of the plant-generated steam, which has been reduced
in the hypothetical replacement plant by using heat recovery on the process units,
needs to be addressed further. Although there is a corresponding cost savings
for the steam generation facilities, there is probably an increased capital cost
associated with the additional equipment needed on the process units to recover
waste heat. The point is that the replacement plant needs to be balanced from both
a capital and operating cost standpoint. This is especially true when appraising
integrated facilities such as oil refineries or other process plants.
Replacement cost is often, but not always, less than reproduction cost. The
following example presents a situation in which replacement cost is greater than
reproduction cost. The question arises: Why would an owner replace an existing
property (i.e., the subject) with a property the replacement cost of which is
greater than the reproduction cost of the subject? This example begins to explain
the answer, although the full explanation may not be apparent until functional
obsolescence is discussed later.
42
Cost Approach
Example 2: Replacement cost greater than reproduction cost.

The task is to appraise a machine that we will call Model A, using the following
information:
• Chronological age of Model A is 6 years.

• Model A is no longer manufactured and has been replaced by Model B.
• The last selling price of a new Model A was $100,000.
• The reproduction cost new of Model A (determined by trending) is $130,000.
• The capacity of both models is 100 units per day.
At first glance, it might be tempting to use the reproduction cost new as the starting
point of the cost approach. However, note that Model A is no longer manufactured
and has been replaced by Model B. After further investigation, the appraiser
determines that Model B also has a capacity of 100 units per day, but its current
cost is $160,000, which is higher than the reproduction cost new of Model A. The
reason for the capital cost difference is a betterment factor due to an advance in
technology that significantly reduces the energy required to produce each unit.
On an annual basis, the subject (Model A) requires 100,000 therms (one therm
= 100,000 BTU) of natural gas, whereas Model B requires only 75,000 therms,
a difference of 25,000 therms. Assuming 50 cents per therm, Model B will save
$12,500 per year in operating cost, which will justify purchasing Model B at the
higher price.9
In this example, the new model is more desirable than the older one because it
can replace the service provided by the subject (i.e., it can produce an equivalent
number of units per day) with reduced energy consumption, which means lower
operating costs. The initial capital cost of the new model is greater than the
reproduction cost of the older model, but this initial capital cost is substantially
offset by reduced operating costs. Therefore, even though the replacement cost
of Model B is greater than the reproduction cost of Model A, the proper starting
point for the cost approach would be the replacement cost new of Model B, or
$160,000. Later, when functional or operating obsolescence is discussed, the
additional depreciation attributable to the subject property (Model A) resulting
from the appraiser’s comparison of the subject to the new model with its reduced
operating cost will be measured (see Example 11).
Methods of Determining Cost New

There are several methods of determining the current new cost of a property.
The major ones are the detail method, trending, cost-to-capacity, and other engineering
methods.
Detail Method
The detail method, also known as the summation method, requires that a current
new cost be assigned to each individual component of an asset or property. The property
43
Cost Approach
is itemized or “detailed” so that the sum of all of the components reflects the cost new of
the whole.
All normal or typical direct and indirect costs should be included. The summation
of all direct and indirect costs in addition to direct material costs are sometimes referred
to as assemblage costs. Direct costs are those material, labor, and related expenditures
normally and directly incurred in the purchase and installation of an asset, or group of
assets, into functional use. Examples of direct costs are:
• Direct material costs, including the item of equipment itself
• Direct labor costs for installation or erection of the item
• Freight and handling
• Rigging and moving
• Electrical
• Piping
• Foundations
• Millwrighting
Indirect costs are those expenditures that are normally required to purchase and in-
stall a property but may be necessary for the purchase and installation of an asset but typi-
cally are not directly attributable to the purchase and installation of a property and are not
usually included in the vendor invoice. Examples of indirect costs include the following:
• Engineering, architect, and other professional fees
• Administrative, accounting, consulting, and legal fees
• Temporary insurance during installation or construction
• Licenses, permits, and fees for installation or construction
• Security costs during installation or construction
• Typical finance charges during installation or construction
• Equipment rental
• Temporary enclosures
• Debugging and run-in costs
• Leasing fees
When developing cost new, only those direct and indirect costs that are typical or
normal may be included; unusual, atypical, or extraordinary costs should be excluded.
Some of the items on the above lists could be normal or extraordinary, depending on the
facts. For example, most large projects require some overtime labor, which would be a
normal expenditure; however, a relatively large amount of overtime to complete a project
in a shorter time than normal would be an unusual expenditure that would not be included
in the estimate of cost new.
44
Cost Approach
Sources of Data
It is essential that the appraiser have access to an adequate cost and reference library.
This library is one of the appraiser’s most valuable tools for establishing and supporting an
opinion of value.
The MTS appraiser is fortunate to have a number of pricing and reference materi-
als readily available (e.g., manufacturers’ and dealers’ catalogs, price lists, and equipment
specifications). Catalogs containing specifications are an important tool for the appraiser;
they can be used to compare one manufacturer’s machine to another’s and to assist in the
determination of cost.
The appraiser’s library should be kept current. The organization, cataloging, and
updating of the pricing and reference material is a matter of individual preference. Most
such libraries are arranged alphabetically by manufacturer or by standard industry code.
A good cost and reference library should contain as much relevant information as
can be reasonably obtained. It is suggested that it contain at least the following:
• Manufacturers’ catalogs, price lists and specification manuals
• Published indices
• Published price guides
• Reference books
• Serial number reference guides
• Vendors’ price lists
Cost and reference materials may be obtained from the following sources:
• Client invoices
• Colleges and universities
• Computerized databases
• Contractors
• Engineering and architectural firms
• Internet sites
• Manufacturers and vendors
• New machinery dealers and representatives
• Newspapers
• Old files
• Other appraisers
• Personal contacts
• Public libraries
• Published price guides
• Trade shows and exhibitions
45
Cost Approach
Appraisers should be aware that the price quoted to them by a supplier may differ
significantly from the price that may be quoted to an actual or potential buyer; that manu-
facturers’ discounts can vary greatly; and that delivery and shipping costs may need to be
added.
Whatever method is used to obtain cost and reference materials—be it verbal,
written, or electronic—rapport must be built with individuals and companies. Good rap-
port with manufacturers and dealers will facilitate access to these data and generate useful
industry contacts. These contacts can provide valuable information on economic trends,
present market conditions, and anticipated future developments. Personal contact with
other appraisers can also be a valuable resource.
Examples of the Direct Cost Method

Examples 3 and 4 illustrate the direct cost method of estimating a property’s cost new:
Example 3: Cost of a machine currently in production.

• The subject to be appraised is a MMM Company engine lathe, model A, size
16” × 30” center-to-center.
• The serial number is 1234 and a serial number guide indicates that the
machine was built in 2000.
• The current cost new of the lathe at the MMM Company’s factory is $50,500
including the cost of the motor and controls.
• The subject includes an XY taper attachment; the current cost of the taper
Attachment at the MMM Company’s factory is $1,500.
• The current cost of freight to the subject site is estimated to be $1,800.
• The current cost of installation is estimated to be $3,200.
• The current cost of sales taxes is estimated to be $2,800 and are determined
to be applicable in this case
• Depreciation or obsolescence is to be ignored for purposes of this example.
The cost new installed of the MMM Company Model A engine lathe can be
estimated as shown in Table 3.2.
Current Cost of MMM Company Model A engine lathe $50,500
Add current cost of taper attachment $1,500
Total Current Cost New at the Manufacturer’s Factory $52,000
Add installation labor $3,200
Add freight $1,800
Add sales taxes $2,800
Total Current Cost New, Installed $59,800
Table 3.2. Example 3 Solution
46
Cost Approach
In Example 3, the appraiser merely needs to include all the normal direct and in-
direct costs. However, it is often necessary to estimate the cost of an item by assembling
many costs or pieces of information. Example 4 illustrates some of the detail that can be
required to develop such an estimate.
Example 4: Cost new of a conveyor at the conveyor manufacturer’s plant.

The task is to estimate the cost of the subject conveyor given the following:
Conveyor Components
The conveyor is 21’6” long center-to-center, 24” wide.
6” formed 308 stainless steel frame is required at each side of the conveyor.
2” diameter by 24” long plastic rollers 12.5” on center.
Roller bed: 2” diameter × 24” long plastic roller return idlers 48” on center
10” diameter by 24” long rubber lagged head drum (one required)
6” diameter × 24” galvanized tail drum (one required)
24” wide 6-ply sanitary rubber belting
8” diameter sprocket with set collar (one required)
4” diameter sprocket with set collar (one required)
1” roller chain drive (one 36” long required)
Angle gear motor drive, 1 horsepower, 48 RPM (revolutions per minute)
220/440-volt alternating current (one required)
Six pair 2” square pipe galvanized saddle legs, 30” high
Wiring Components
One flexible connection
12 linear feet 1/2” conduit with 3 strands 14-gauge wire
Safety switch, 30 amp, 240 volt (one required)
Other Costs
Labor: The time to fabricate the conveyor at the manufacturer’s plant is
2 men for 8 hours each.
Engineering: The time to engineer and design the conveyor is 1 man for
16 hours.
Overhead and profit: All of the manufacturer’s overhead and profit is

included in the unit costs set out herein.
47
Cost Approach
Costs
• 6” formed 308 stainless steel frame, $15.40 per linear foot
• 2” diameter × 24” long rollers, $24.15 each• 24” wide 6-ply sanitary rubber
belting, $6.95 per linear foot
• 8” sprocket with set collar, $15.35 each
• 4” sprocket with set collar, $9.55 each
• 10” diameter × 24” rubber lagged head drum with pillow blocks and
bearings,$69.30 each
• 6” diameter galvanized tail drum assembly complete, $26.75 each
• 1” roller chain, $2.63 per linear foot
• Motor, 1 horsepower, 48 RPM, $765.50 each
• 1 pair 2” square pipe saddle legs, adjustable height, $15.40 each
• 1 flexible connection, $22.39
• 1/2” conduit and wire, 3 strands 14-gauge wire, $5.17 per linear foot
• 30-amp, 240-volt safety switch, $197.65 each
• Labor for fabrication (including all payroll burdens), $33.68 per hour
• Engineering (including all payroll burdens),$38.35 per hour
The cost new to design and fabricate the conveyor can be estimated as shown in
Table 3.3.
48
Cost Approach
Description Unit Pricing Cost

Stainless Steel Frame 43’ @ $15.40 LF (2 sides x 2’-6” = 43’) $662.20
20 @ $24.15 Each (21’-6” minus 5” head and

Plastic Rollers 3” tail = 20’-10”÷ 12.5” center-to-center = 20) $483.00
5 @ $24.15 Each (21’-6” minus 5” head and

Return Rollers 3” tail = 20’-10” ÷ 50” center-to-center = 5) $120.75
Belting 45’ @ $6.95 LF (see calculations in footnote)* $312.75
Head Drum 1 @ $69.30 Each $69.30
Tail Drum 1 @ $26.75 Each $26.75
8” Diameter Sprocket with Set Collar 1@ $15.35 Each $15.35
4” Diameter Sprocket with Set Collar 1 @ $9.55 $9.55
1” Roller Chain 3’ @ $2.63 LF $7.89
Gear Motor 1 @ $765.50 Each $765.50
6 Pair Legs 6 pair @ $15.40 Each $92.40
1 Flexible Connection 1 @ $22.39 $22.39
½” Conduit and Wire 12’ @ $ 5.17 LF $62.04
Safety Switch 1 @ $197.65 Each $197.65
Labor 2 men at 8 hrs. = 16 Hrs. @ $33.68 Per Hour $538.88
Total Direct Cost $3,386.40
Engineering 16 Hrs. @ $38.35 Per Hour $613.60
Total Cost or Total Reproduction or Replacement Cost New $4,000.00
(At the conveyor manufacturer’s plant. Freight and handling to a user is not included).
Table 3.3. Example 4 solution.10
Example 4 uses the same techniques used in Example 3. The only difference is that
the level of detail is much greater in Example 4 than in Example 3.
In both cases, it could be said that the result is a “like-for-like” cost, that is, repro-
duction cost new. On the other hand, since the examples do not assume that the hypotheti-
cal replacement property would have any design or operating cost advantages, the result
could also be described as an “equivalent utility” cost, that is, replacement cost new.
Strengths and Weaknesses of the Detail Method

In theory, the detailed itemizing of cost components should result in greater accu-
racy than less detailed methods while at the same time identifying the cost component hav-
ing the greatest effect on the total cost of the property. Thus, the direct method is sometimes
preferred over methods based on gross costing such as cost per linear or cost per square
foot (sometimes called “unit costing”).
On the other hand, a problem with the detail method is that it is not always practi-
cal, or possible, to create a complete list of all of the components or their costs. It is easy
49
Cost Approach
to inadvertently omit components that are material to the valuation. Other problems with
the detail method:
• Creating the detail is often time consuming and can significantly
increase the cost of the appraisal while possibly not yielding any
considerable increase in the degree of accuracy.
• A large amount of detail may not be required either by the client or to
accomplish the purpose of the appraisal.
• It may not be possible to itemize all the costs because the required
engineering specifications and documentation may not be available
or the property may be a type that is bought and sold as a system or
package.
The appraiser will learn through experience when to use, and not use, the detail
method. If the detail method is used, the appraiser should review the results to see whether
they make sense, such as by comparing them with results produced by other methods.
Trending Method
Trending is a method of estimating a property’s reproduction cost new (not replace-
ment cost new) in which an index or trend factor is applied to the property’s historical cost
to convert the known cost into an indication of current cost. Simply put, trending reflects
the movement of price over time.
As used in this book, historical cost is the cost of a property when it was first placed
into service by its first owner. This is to be distinguished from original cost, which is the
initial cost of a property in the hands of its present owner, who may not be the first owner
and who may have purchased at a price greater or less than the historical cost.11 Original
cost may be the used cost of the property, whereas historical cost can never be a used cost.
Obviously, historical cost and original cost may be the same.
When trending, an index or trend factor is applied to the property’s historical cost,
not original cost. An index is a “number used to measure change in prices, wages, employ-
ment, production, etc.; it shows a percentage variation from an arbitrary base year standard
where the index is usually 100, representing the status at some earlier time....” 12 The indexes
commonly used by appraisers are sets of numbers measuring changes over time in the cost
of assets, material, or labor. A sample index is shown in Table 3.4 for illustration purposes
only.
Year Index
2006 100
2007 103
2008 105
2009 108
2010 112
Table 3.4. Sample index.
To estimate the current reproduction cost new in 2010 of a machine that had a
historical cost in 2006 of $1,000, the calculation would be:
50
Cost Approach
Where the formula is reflected as follows:

 Current Index 
Current Reproduction Cost New =   x Historical Cost
 Base Year Index 
Then by substitution:
 2010 Index 
Current Reproduction Cost New =   x Historical Cost
 2006 Index 
 112 
Current Reproduction Cost New =   x $1,000 =
 100 
Current Reproduction Cost New = 1.12 x $1,000 = $1,120
The use of indexes and trending can easily lead to erroneous results. The following
cautions are offered:
• Indexes generally do not reflect technological advances that may actually
reduce cost new; thus, trending does not indicate replacement cost new or
provide a means to measure the difference between reproduction cost new
and replacement cost new.
• Trending should not be applied to anything other than a historical cost, that is,
the cost of a property when it was first placed into service by its first owner.
• The appraiser should be certain that the cost to which a trend factor is applied
is actually the historical cost, and not a cost resulting from a prior allocation
of purchase price or a used cost.
• The historical cost that one is attempting to trend may not be typical cost; that
is, it may include extraordinary costs or exclude indirect costs, and so on.
• Cost indexes are based on average values, but specific cases (including the
subject property) may differ from the average.
• Trending the costs of used equipment is improper because costs of used
equipment are generally not impacted over time at the same rate as new costs.
• Caution should be exercised regarding the use of trending for periods in excess
of ten years, unless the accuracy of the trended result can be independently
confirmed by comparing it with the results of other methods of estimating
cost new. This is especially true when using a broad-based index or in periods
of relatively high inflation.
• The index factor should match the subject property; hence, the user should
know at least the basics of how the index was developed.
• Trending can be a useful tool in developing an effective or average age of
an investment in a complex property such as a petrochemical plant that has
investments that span many decades.
Cost-to-Capacity Method
A third method of estimating cost new is commonly referred to as cost-to-capacity
method. According to Frederic Jelen and James Black:
51
Cost Approach
The costs of similar plants or pieces of equipment of different sizes vary with the
size raised to some power. This relationship can be expressed mathematically as follows:
 C   Q  x 
 2  =  2  
 C1   Q1  
Here, C2 is the desired cost of capacity Q2 and C1 is the known cost of Capacity Q1.
A frequent value for X is 0.6, so this relationship is often referred to as the six-tenths (0.6)
factor rule... The exponent X can be determined by plotting actual historical costs for the
equipment or plant as the ordinate on log-log paper and the equipment or plant size as the
abscissa. The slope of the resulting line through the data will be the cost-capacity factor.13
This methodology assumes that not all costs vary with size in a straight line. For
example, if the cost of a 10,000-gallon tank is $7,000, it does not necessarily mean that
the cost of one twice as big, or one with a 20,000 gallon capacity, is $14,000. The cost-to-
capacity method can be applied to many different items of equipment or to entire facilities.
Cost-to-capacity analyses have been prepared for entire process facilities as well as com-
ponents of facilities, including pumps, tanks, blenders, compressors, heat exchangers, and
others. Studies indicate that although cost capacity factors average about 0.6 to 0.7, they
vary depending on the property in question. The appraiser should not assume, because of
the term six-tenths factor rule, that the appropriate factor is necessarily the same as or even
close to 0.6. The factor can be obtained from published data if the published data matches
the subject property.14 If a published exponent is not available, the appraiser can develop
an exponent if the price and capacity of two or more items similar to the subject are known.
Examples 5 and 6 show how to use the cost-to-capacity method to estimate the cost
new of an entire process plant.
52
Cost Approach
Example 5: Cost-to-capacity when the exponent is known.

Assume that it is known that the cost new of an ethylene plant with a capacity of
100,000 tons per year is $16,000,000 and what is needed is the estimate of the cost
of a plant with a capacity of 200,000 tons per year.
Solution — Using a 0.6 factor (for illustration purposes only):
The formula is:

X
Q 
C2 = C1  2 
 Q1 
Where:
C2 = Desired cost of capacity Q 2
C1 =Known cost of capacity Q1
X =Cost-capacity factor
Solution:
0.6
 200, 000 
C2 = $16,000,000   = $24,251,465
 100, 000 
Further information on the cost-to-capacity method can be found in engineering

textbooks such as Cost and Optimization Engineering,15 Cost Engineering in the
Process Industries,16 and Basic Cost Engineering.17
53
Cost Approach
Example 6: Cost-to-capacity when the exponent is not known.

Calculate the exponent x in the cost-to-capacity relationship for a 4,000-unitcapacity
item, given the information in Table 3.5 for 2 other known units A and B.
Variable Unit A Unit B

Size 5,000 = Q2 3,000 = Q1
Price $171,000 = C2 $119,000 = C1
Table 3.5. Unit costs and their related parts of the cost-to-capacity formula.
Solution:
 C   Q  x 
Cost to Capacity Formula:  2  =  2  
 C1   Q1  
$171,000  5, 000 
Then by substitiution: = x
$1119,000  3, 000 
Then: 1.43697 = 1.66667 x
Note: The exponent “x” in the above formula can be derived using logarithms as
follows:
Natural Log of 1.43697 = .3625

Natural Log of 1.66667 = .5108
Then .3625/.5108
x = 0.7097 (rounded to 0.71)
Therefore, with an exponent of 0.71, the cost of a 4,000-capacity unit (C3) can be
estimated as follows:
0.71
 4, 000 
C3 = $171,000  
 5, 000 
C3 = $171,000 x ( 0.8 )
0.71
C3 = $171,000 x 0.8535
C3 = $145,945
Problems with Cost-to-Capacity

The cost-to-capacity method must be used with caution. In fact, many of the cau-
tions expressed earlier with respect to trending are also applicable to this method. The
appraiser should not use the cost-to-capacity formula to scale up a unit or plant beyond
what is practical. When large differences in capacity are being calculated, significant error
can occur if such large differences are misapplied.
Another problem with the method is attempting to extrapolate the results to sizes or
capacities that are significantly larger or smaller than the range of the known data. For ex-
54
Cost Approach
ample, the exponent 0.69 may be valid for squirrel cage induction motors ranging between
5 and 20 horsepower; however, this exponent may not apply to motors of the same kind
ranging between 100 and 200 horsepower. For example, if the exponent is 0.6, the error
introduced by different capacity ratios is indicated by Jelen and Black to be as presented
in Table 3.6.
Actual Cost to Capacity Factor

0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Ratio of Capacity Percent Error
Q2:Q1
5:1 +89 +61 +37 +17 0 -16 -28 -39 -48
10:1 -150 +100 +59 +26 0 -21 -37 -50 -60
Table 3.6. Percent error from improper use of cost-to-capacity.
Table 3.6 demonstrates the magnitude of the error from misapplication of the cost-to-
capacity method. As the ratios of capacity Q2 to capacity Q1 increase from 5:1 to 10:1, so
does the percentage of error. If the appraiser tried to use the exponential factors for other,
larger quantity ratios such as 20:1, 50:1, or 100:1, the results could be meaningless.
Other Engineering Methods

Several other engineering methods may be used to estimate the cost of entire fa-
cilities or components of facilities; most of these methods are best used in chemical or
petrochemical processing industries.
The Lang factor method estimates the total facility cost as a function of the equip-
ment cost. For example, if the appropriate factor or multiplier for a particular kind of
process facility is 5.5 and the cost of the equipment is $6,000,000, then the total facility
estimated cost would be $33,000,000 ($6,000,000 × x 5.5).
The Hand factor method uses different multipliers for different types of equipment,
which may yield a greater accuracy than the Lang factor method. For example, if the ap-
propriate installation multiplier is 8.0 for pumps and 4.5 for tanks, and if the uninstalled
cost is $3,000 for the pumps and $50,000 for the tanks, then the installed cost of these
assets could be estimated as follows:
Pumps: $3,000 x 8.0 = $24,000

Tanks: $50,000 x 4.5 = +$225,000
Estimated Installed = $249,000
Cost
The appraiser must use caution when applying the Lang or Hand methods, because
the same considerations applicable to exponential sizing may also apply to these methods.
Some of the size differences are often taken into consideration in the estimation of the basic
equipment costs.
There are several other methods available to assist in estimating the cost new of
process plants or portions of those plants. Among these are the Chilton method, plant cost
55
Cost Approach
by analytical procedures method, Peters-Timmerhaus ratio factors method, compartmen-

talization method, Miller method, turnover ratios method, and investment cost per unit of
capacity method. Descriptions of these methods can be found in various cost engineering
books and industry handbooks.
In conclusion, there are several methods available for estimating the cost new of a
property. It is often necessary to use more than one method to estimate the cost new of a
plant or other complex set of assets. For example, assume the appraiser knows the cost of
a 5-year-old plant that is similar in most respects to the subject but of a different capacity;
moreover, the subject plant also has a separate division making a product not made at the
5-year-old plant. Here the appraiser may use the cost-to-capacity method to establish the
plant size relationship, trending to reflect the current cost of the 5-year-old plant, and the
detail method to add the components of the separate division.
Depreciation from All Causes

Concept of Appraisal Depreciation
In Chapter 1, the point was made that the accounting concept of depreciation differs
entirely from the appraisal concept of depreciation. Grant defines “appraisal depreciation”
as “the difference in value between an existing old property and a hypothetical new prop-
erty taken as a standard of comparison.”18 He goes on to explain that “appraisal deprecia-
tion should measure value inferiority” and that
“The most economical new substitute property may have many advantages
over an existing old property, such as longer life expectancy, lower annual
disbursements for operation and maintenance, increased receipts from
sale of product or service. The depreciation deduction from the cost of the
hypothetical new substitute property should be a measure in money terms
of all of these disadvantages of the existing old property.”19
Types or Causes of Depreciation

The three types or causes of appraisal depreciation traditionally recognized by ap-
praisers are physical deterioration, functional obsolescence, and economic obsolescence.
The traditional definitions of these terms are as follows:
Physical deterioration is a form of depreciation where loss in value or
usefulness of a property is due to the using up or expiration of its useful
life caused by wear and tear, deterioration, exposure to various elements,
physical stresses, and similar factors.
Functional obsolescence is a form of depreciation in which the loss in value
or usefulness of a property is caused by inefficiencies or inadequacies of the
property itself, when compared to a more efficient or less costly replacement
property that new technology has developed. Symptoms suggesting the
presence of functional obsolescence are excess operating cost, excess
construction (excess capital cost), over-capacity, inadequacy, lack of utility,
or similar conditions.
56
Cost Approach
Economic obsolescence (sometimes called “external obsolescence”) is a

form of depreciation where the loss in value of a property is caused by factors
external to the property. These may include such things as the economics of
the industry; availability of financing; loss of material and/or labor sources;
passage of new legislation; changes in ordinances; increased cost of raw
materials, labor, or utilities (without an offsetting increase in product price);
reduced demand for the product; increased competition; inflation or high
interest rates; or similar factors.
Physical Deterioration
Once the proper level of current cost new has been determined, deductions must
be made for all forms of depreciation. Normally physical deterioration is considered first.
Physical deterioration is the loss in value or usefulness of a property due to the using up
or expiration of its useful life caused by wear and tear, deterioration, exposure to various
elements, physical stresses, the passage of time, and similar factors. It is generally a result
of the expiration of the property’s useful life over time, exposure to natural elements or
the process area environment, internal defects from vibration and operating stress, and
similar factors. Excessive deterioration often reduces tolerances on manufacturing equip-
ment, resulting in higher product rejection and ultimately the inability to meet production
standards. Dealing with the effects of physical deterioration often requires the owner to
make higher-than-average maintenance expenditures. On the other hand, below-average
maintenance expenditures may indicate the possibility of deferred maintenance and in-
creased deterioration.
Physical deterioration is often estimated as a percentage: a new property has 0%
physical deterioration, while a property that is completely exhausted and has no scrap
value has 100% physical deterioration, with all other properties having different degrees
of deterioration falling between these two extremes. Theoretically, physical deterioration
can be measured objectively. A machine will produce x number of parts in its physical
life. Assuming that adequate statistics were kept, the machine was never rebuilt or abused,
and all assets of the same type are equivalent, then a simple ratio of the past production
to the expected production would result in an objective measure of physical deterioration.
Obviously, machines are rebuilt, they are used and abused, and their production quality
varies. Except for large or high-cost assets, production statistics are usually not available
for individual assets. Therefore, measuring physical deterioration is often subjective. Often
the appraiser must rely on how similar assets have performed in the past in order to make
judgments of the physical condition of the subject.
Definitions of Condition
Condition is a characteristic that can be determined only through observation. It is
advisable for the appraiser to relay in the appraisal report a clear understanding as to the
various definitions of condition. The subject of condition can be an area of disagreement.
Several individuals could inspect an item of equipment and have differing descriptions as
to its condition. The overall condition of an item should be discussed in the appraisal report
and, if appropriate, an explanation of condition should also be included in the appraisal
report. A suggested set of terms and symbols is given below.
57
Cost Approach
New (N) This term describes new items that have not been used before.
Excellent (E) This term describes those items that are in near-new condition and have had
very little use.
Very Good (VG) This term describes an item of equipment in excellent condition capable of
being used to its fully specified utilization for its designed purpose without being modified
and without requiring any repairs or abnormal maintenance at the time of inspection or
within the foreseeable future.
Good (G) This term describes those items of equipment which are in good operating
condition. They may or may not have been modified or repaired and are capable of being
used at or near their full designed and specified utilization.
Fair (F) This term describes those items of equipment which because of their condition are
being used at some point below their full designed and specified utilization because of the
effects of age and/or application and that may require general repairs and some replacement
of minor elements in the foreseeable future to raise them to be capable of being utilized to
or near their original specifications.
Poor (P) This term is used to describe those items of equipment which because of their
condition can be used only at some point well below their full designed and specified
utilization, and it is not possible to realize full capacity in their current condition without
extensive repairs and/or the replacement of major elements in the near future.
Salvage (S) This term is used to describe those items of equipment whose value remains in
the whole property or a component of the whole property that has been retired from service.
Scrap (X) This term is used to describe those items of equipment which are no longer
serviceable and which cannot be utilized to any practical degree regardless of the extent
of the repairs or modifications to which they may be subjected. This condition applies to
items of equipment which have been used for 100% of their useful life or which are 100%
technologically, functionally or economically obsolete and are no longer serviceable and
have no value other than for their material content.
The list of suggested definitions is for guidance only. Appraisers may establish
whatever terms and coding that they feel satisfies the need to explain their opinion of
condition in the appraisal report.
Measuring Physical Deterioration

The best procedure to follow when measuring physical deterioration is to rely on
the facts and circumstances applicable to the subject, particularly the age and use of the
property. When trying to measure only one type of accrued depreciation, the appraiser
should strive to carefully segment the three elements of depreciation—physical, functional,
and economic—and should deal with each element individually. When trying to estimate
only physical deterioration, appraisers should avoid inadvertently including functional or
economic obsolescence in the measurement of “physical deterioration.”
58
Cost Approach
The use of a property is often a good indicator of physical deterioration. Machines

used 24 hours per day will physically deteriorate faster than the identical units operated 8
hours per day. Machinery employed in dusty, dirty, abrasive, or corrosive atmospheres will
deteriorate faster than the same property in a clean environment. Machines that have just
been rebuilt are in better physical condition than those that need to be rebuilt. A fresh coat
of paint does not change the physical condition of a property. It may suggest a high level
of maintenance, but new paint may also be used to cover defects. The appraiser should
go beyond casual observation to investigate any extraordinary care and maintenance or
abnormal wear and tear.
When a property such as a machine tool is rebuilt, its physical deterioration is
partially, but not completely, corrected because the rebuilt machine is not new and some
physical deterioration (incurable) exists that cannot be corrected. This difference in value
can be measured by comparing the selling price of a new unit with the price of one rebuilt
and offered for sale by a used equipment dealer.
In some industries, certain maintenance practices are performed that will aid the
appraiser in measuring physical deterioration. In the petrochemical industry, ultrasonic
inspections of wall thickness for assets such as vessels, tanks, columns, and reactors are
common practice. Tank bottoms and tops are replaced more frequently than tank walls. In
smelting operations, the refractories in melting furnaces are replaced regularly, while the
shell suffers very little wear. These kinds of maintenance practices can be investigated and
used in estimating physical deterioration. The maintenance staff responsible for the equip-
ment can be useful sources of information concerning the physical condition of the assets.
When estimating physical deterioration, the appraiser should strive for consistency.
While opinions will differ as to the condition of the same asset, a systematic approach by
an appraiser allows others reviewing the appraiser’s work product to see the asset from the
appraiser’s viewpoint.
The following discussion suggests some ways to objectively measure physical de-
terioration. The three methods of measuring physical deterioration that will be discussed
here are observation, formula ratio (such as use vs. total use), and direct dollar measure-
ment. Ultimately, however, it must be said that isolating and measuring just physical dete-
rioration is sometime difficult. Nevertheless, appraisers must address the issue and should
strive to base their opinions on the actual facts and circumstances.
Observation
In this method, the appraiser makes a comparison based on the personal experi-
ence gained by looking at similar properties and comparing them to new properties. The
procedure involves actually observing those elements of wear and tear that can be seen and
converting those observations into a percentage. It also involves discussions with knowl-
edgeable plant personnel to determine the condition of those aspects that might not be
readily apparent, such as internal corrosion on tanks. On the basis of the facts, the appraiser
must develop an opinion of physical deterioration, stated in the form of a percentage, to
deduct from replacement or reproduction cost new.
59
Cost Approach
Use/Total Use
Another method of estimating physical deterioration involves analysis based on a
property’s use. Use is a good indicator of physical deterioration when the requisite produc-
tion statistics can be obtained. In its simplest form, physical deterioration can be estimated
by the ratio of
Use
Total Use
Given some unit of measure, this ratio measures the amount of use of a property at
a point in time compared with the total use expected from that asset. For example, assume
that the normal physical life of a machine is 100,000 hours. If a specific machine has
logged 40,000 hours, it is logical to conclude that under normal conditions, the physical
deterioration is approximately 40% ([40,000 ÷ 100,000] × 100 = 40%).20
In the case of a new asset, total use is synonymous with the expected use that
in this example is 100,000 hours. Purists will argue, and rightfully so, that considering
depreciation in this manner is a linear or straight-line calculation of deterioration. In other
words, at 50,000 hours, the machine would be depreciated 50%, at 60,000 hours, 60%, and
so on. This implies that when the machine reaches 100,000 hours it is 100% or completely
depreciated. A contradiction arises when the machine has 100,000 hours and is still operat-
ing. When this occurs, total use in the above ratio is defined as the sum of the usage to
date (100,000 hours) plus the remaining useful life, measured in hours. If the machine
has 100,000 hours and is expected to last another 25,000 hours, the physical deterioration
would then be 80%, developed as follows:
 100, 000    100, 000  

  x100  =   x100  = 80%
 100, 000 + 25, 000    125, 000  
Now consider the situation where the machine has 75,000 hours, has just been
rebuilt, and has an expected remaining life of 50,000 hours. Physical deterioration would
then be developed as follows:
 75, 000  
Physical Deterioration =   x 100  = 60%
 75, 000 + 50, 000  
Age/Life
The ratio of a property’s “age” to its “life” can be used to measure physical deterio-
ration. Although this is straight-line depreciation, it should not be confused with account-
ing depreciation because the appraiser uses valuation rather than accounting concepts of
age and life.
Depending on the purpose of the appraisal analysis, different appraisal definitions
of age and life can be used as the numerator and denominator in the “age/life” ratio. The
various definitions will be presented at this point to facilitate our discussion, although some
of the terms will not be used until later.
60
Cost Approach
Chronological age is the number of years that have elapsed since a property
was originally built or placed in service.
Effective age is the apparent age of a property in comparison with a new
property of like kind; that is, the age indicated by the actual condition of a
property. In estimating effective age, the appraiser considers the effect that
overhauls, rebuilds, and above-average or below-average maintenance may
have had on the property’s current condition. If a property has received
regular overhauls, its effective age will normally be less, often significantly
less, than its chronological age. Effective age is often the more appropriate
numerator in the age/life ratio than is chronological age. The effective age
can also be estimated based on the weighted average age of the trended
historical cost.
Normal useful life is the physical life, usually estimated in terms of years,
that a new property will actually be used before it is retired from service. A
property’s normal useful life relates to how long similar properties actually
tend to be used, as opposed to the more theoretical economic life calculation
of how long a property can profitably be used. The best evidence of normal
useful life is statistical or actuarial data derived from the study of properties
that are similar to the subject under actual operating conditions. An asset’s
useful life may be longer than its economic life because the owner may elect
not to retire the asset from service upon expiration of the asset’s theoretical
economic life.
Remaining useful life is the estimated period during which a property of a certain
effective age is expected to actually be used before it is retired from service.
The best evidence of remaining useful life is statistical or actuarial data derived
from the study of properties that are similar to the subject under actual operating
conditions. Remaining useful life can sometimes be approximated by deducting
the asset’s effective age from its normal useful life; however, this is an
oversimplification and not technically correct in some situations, for the
same reason that a person who had a 72-year life expectancy when born,
and is now 70 years old, has more than a 2-year remaining life expectancy
according to human mortality tables. Statistical and actuarial studies of
asset useful lives indicate that many assets follow a similar pattern.
Physical life is the estimated period of time, usually stated in number of
years, that a new property will physically endure before it deteriorates or
fatigues to an unusable condition purely from physical causes, without
considering the possibility of earlier retirement due to functional or
economic obsolescence.
Remaining physical life is the estimated period during which a property of a
certain effective age is expected to physically endure before it deteriorates
or fatigues to an unusable condition purely from physical causes, without
61
Cost Approach
considering the possibility of earlier retirement due to functional or

economic obsolescence.
Economic useful life is the estimated period of time, usually stated in
number of years, that a new property may be profitably used for the purpose
for which it was intended. Stated another way, economic life is the period
of time, usually stated in of years, that a new property can be used before
it would pay the owner to replace it with the most economical replacement
property that could perform an equivalent service. Functional or economic
obsolescence factors may limit a property’s economic life. An asset’s
economic life will often be less than its normal useful life.
Remaining economic life is the estimated period of time, usually stated
in number of years, during which a property of a certain effective age is
expected to continue to be profitably used for the purpose for which it was
intended. It can be approximated by deducting the asset’s effective age from
its economic life, although this is an over-simplification and not technically
correct in some situations for the same reasons given above with respect to
remaining useful life.
In its simplest form, the age/life formula can be used to estimate physical deteriora-
tion using the following formula:
Effective age
= Percent of physical deteriorattion
Physical life
For example, if a property has an effective age of 8 years and a physical life of 20
years, physical deterioration will be 40%.
For larger, older, or more complex property, the age/life concept can be expanded
as follows:
Effective age
= Percent of physical deterioration
( Effective age + Remaining physical life )
It is essential that the appraiser understands that some of the definitions given above,
if substituted in the age/life equation, will measure more than just physical deterioration.
Measuring more than physical deterioration is often appropriate, as long as the appraiser is
aware of what factors are actually being considered in the process.
An advantage of using the age/life technique is that effective age can often be
calculated using the client’s fixed asset records. The effective age can be determined by
weighting the investment in a property or a group of assets. The weighting should be done
on some equitable basis and must consider additions or deletions made over the asset’s life.
The procedure can be used for a single asset (if the records are sufficiently detailed) or,
more commonly, for groups of assets. The next example illustrates a method of estimating
effective age.
62
Cost Approach
Example 7: Effective age.

The task is to determine the effective age of a property being appraised as of
January 2010. The property was purchased new in 2000 and capital expenditures
for additions were made in 2003 and 2005. In addition, a major overhaul was
completed in 2008 that effectively replaced some of the original equipment.
The first step is to develop the proper basis for comparison, which in this case is
trended historical cost. This is determined by applying the appropriate cost index
to the historical cost for each year (see Table 3.7).
Purchase Historical Index Trended

Date Cost times Translator equals Historical Cost
2000 $20,000 x 2.60 = $52,000
2003 $2,000 x 1.95 = $3,900
2005 $2,500 x 1.60 = $4,000
2008 $17,500 x 1.20 = $21,000
Totals $42,000 $80,900
Table 3.7. Application of a cost index (for illustration purposes only).
The total historical cost of $42,000 and the total trended historical cost of $80,900
shown in Table 3.7 are somewhat misleading because they include some redundant
investment resulting from the overhaul in 2008. In other words, these total costs
include not only the initial costs but also the costs of those assets that were replaced
as part of the 2008 overhaul. For example, if the $17,500 expended in 2008 was
to replace a pump, the cost is included twice: as part of the original investment in
2000 and again in 2008. To adjust for this duplication, it is necessary to delete the
2000 dollars. This is accomplished by restating the 2008 overhaul in 2000 dollars
by “back-trending” as follows:
  1.20  
$17,500    = $8,076.92 = $8,100 rounded
  2.60  
The historical cost of $20,000 in 2000 minus $8,100 equals $11,900, which is the
restated historical cost less the redundant investment. The calculations to this point
are summarized in Table 3.8.
Purchase Adjusted Index Trended

Date Historical Cost times Translator equals Historical Cost
2000 $11,900 x 2.60 = $30,940
2003 $2,000 x 1.95 = $3,900
2005 $2,500 x 1.60 = $4,000
2008 $17,500 x 1.20 = $21,000
Totals $33,900 $59,840
Table 3.8. Trended adjusted historical cost (for illustration purposes only).
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Cost Approach
The next step is to weight the trended historical costs (as adjusted) using their age.
This is done by multiplying each trended historical cost by its chronological age
(see Table 3.9).
Chronological
Age of
Purchase Trended Investment, Weighted
Date Historical Cost times Years equals Investment
2000 $30,940 x 10 = $309,400
2003 $3,900 x 7 = $27,300
2005 $4,000 x 5 = $20,000
2008 $21,000 x 2 = $42,000
Totals $59,840 $398,700
Table 3.9. Determination of weighted investment (for illustration purposes only).
The last step is to determine the composite effective age. This is done by dividing
the total weighted investment by the total trended historical cost, as follows.
$398,700
= 6.66 years = 7 years (rounded)
$59,840
The rounded result of 7 years is a reasonable estimate of the effective age of the
assets being appraised.
The problem presented in Example 7 has been simplified to illustrate techniques

and concepts. Cost information was used as an equitable basis for comparison. There are
other bases that may be appropriate. For example, when trying to estimate the age of a
building, an appraiser may wish to develop the effective age on the basis of building area;
for equipment, the appraiser may consider estimating the effective age on a capacity basis.
There are some simpler methods that are not as accurate as the method illustrated
above. One of these shortcut techniques is to use the trended historical cost information to
develop a composite cost index and interpolate using the cost index. If we did that using the
data in Table 3.9, the composite cost index derived by dividing the trended historical cost
by the historical cost (as adjusted in Table 3.8) is 1.765. Interpolating the 1.765 against the
cost indexes as of 1.60 and 1.95, or 2003 and 2005, indicates a weighted investment date
of approximately 2004, or 6 years (the property is being appraised as of 2010).
Another technique that could be used to estimate effective age is weighting the “ad-
justed historical cost” from Table 3.8 based on age (i.e., adjusted historical cost multiplied
by age in years). If this method is used with the same facts as above, the effective age is
5.32 years as determined by the calculations in the following Table 3.10.
64
Cost Approach
Chronological Age
Adjusted of Investment, Weighted
Date Historical Cost times Years equals Investment
2000 $11,900 x 10 = $119,000
2003 $2,000 x 7 = $14,000
2005 $2,500 x 5 = $12,500
2008 $17,500 x 2 = $35,000
Totals $33,900 $180,500
$180,500
= 5.3245 = 5.32 rounded
$33,900
Table 3.10. Alternative determination of effective age.
The different result of 5.32 produced by this alternative method, compared to the
effective age of 6.66 years calculated in Example 7, is caused by the different assumptions
underlying the weighting. The method shown in Example 7, resulting in an effective age
of 6.66 years (which was rounded to 7 years), is the most accurate because it measures the
age of the asset on an equitable, trended cost basis. Establishing a composite cost index
and interpolating is not as accurate because of the inaccuracy inherent in the interpolation
process, as well as the fact that there may be short-term aberrations in the cost index.
Another method occasionally seen (and not discussed above), that of using untrended his-
torical cost multiplied by age, is wrong and inaccurate because it gives equal weight to
each cost, regardless of the year in which the cost was expended. The degree of error can
be substantial when the effective age calculation involves a long span of years or a period
during which inflation was significant.
The advantage of the ratio technique demonstrated in the example is that it is pos-
sible to reasonably estimate the effective age of a property, assuming that the required data
are accurate and available. Even using this method, the problem that remains is estimating
the remaining physical life of that asset. If some physical defects are known that will limit
the physical life, a reasonable estimate can be made.
Example 8: Determination of physical condition.

The subject to be appraised is a process furnace that operates continuously 24 hours
a day, 7 days a week, and the appraiser is trying to estimate its physical condition. In
discussions with the operating and maintenance personnel, the following has been
determined: the furnace has operated normally since it was installed approximately
12 years ago; some patching on the flues and ductwork was done approximately
5 years ago; some pumps, piping, and other external equipment were replaced
approximately 2 years ago; and the refractory components will need to be replaced
in approximately 5 years.
For this example, assume that the effective age has been calculated to be 8 years
using the method shown in Example 7. Further, assume that the cost of the furnace
components breaks down to 30% for the refractory, 50% for the structural members,
and 20% for the other equipment.
65
Cost Approach
The next step would be to estimate the composite physical remaining life for the
entire furnace. The appraiser learned that once the refractory is replaced (in 5 years),
the furnace can readily operate for another 15 years, so the physical remaining life
of the structural members is 20 years (15 + 5 years). Although the other equipment
is in relatively good condition, the owners do not expect it to last as long as the
structural members will last. They expect to perform some maintenance on this
other equipment to extend its life. The composite physical remaining life for the
entire furnace can be developed as shown in Table 3.11:
Estimated Weighted
Percent of Physical Remaining
Investment times Remaining Life equals Life
Refractory 30% x 5 = 1.5
Structural 50% x 20 = 10.0
Members
Other Equipment 20% x 15 = 2.0
Totals 100% 14.5
Table 3.11. Composite physical remaining life.
The composite physical deterioration is simply the ratio of the effective age (8 years)
divided by a denominator that is the sum of the effective age and the remaining
physical life (8 + 14.5 years), which computes to 36% rounded as follows:
Percent Physical Deterioration =

8 8
= = 35.56% = 36% rounded
8 + 14.5 22.5
Note that this is an estimate of the physical condition of the furnace as it exists. It
does not consider the cost of the additional work that would be necessary to extend
the life beyond that which is currently anticipated.
Using Age/Life to Estimate Total Depreciation (Physical, Functional,

and Economic)
The age/life technique can also be used to estimate more than just physical de-
terioration, when supported by the facts. For example, assume that you are appraising a
pollution abatement facility and a law has been passed requiring the owner to abandon
the facility within 3 years and replace it with a different facility. Furthermore, assume the
existing assets are 5 years old and have a physical remaining life of 15 years. In this case
physical deterioration would be 25% (5 ÷ 20 × 100 = 25%). Since this asset has a 3-year
remaining economic life because of the environmental mandate, the total (overall) depre-
ciation (physical, functional, and economic) is approximately 63%, developed as follows:
5
Total Depreciation Percent = = 0.625 x 100 = 62.5% = 63% roundded
5+3
66
Cost Approach
Another example of calculating total depreciation appears later in Example 13.

Again, it is necessary to use this concept in light of the facts and circumstances that affect
the property being appraised.
The age/life technique discussed here is based on straight-line valuation depre-
ciation concepts (not straight-line accounting depreciation). The analysis establishes the
position of the subject property at an appropriate point in its life cycle. When adjustments
are made for observed conditions relating to past and future use, this analysis becomes a
valid tool in the appraisal process. It should be noted that the age/life method is a relatively
simple way to look at age, life, and use of a property. When sufficient data are available,
there are more sophisticated quantitative methods for measuring some kinds of deprecia-
tion. For additional information, the MTS appraiser is directed to Engineering Valuation
and Depreciation,21 which discusses additional methods of measuring value loss caused
by expiration of service life and estimating asset lives, including the Iowa-type survivor
curves.
Direct Dollar Measurement

The age/life technique is most useful for newer properties or properties in midlife.
When a property requires a significant expenditure to solve a physical problem or a particu-
lar component has a short remaining physical life, the appraiser can use this information
to estimate physical deterioration by the direct dollar measurement method. This concept
involves measurement of the dollar amount of physical deterioration. It is applicable when
specific components have deteriorated and can economically be cured. This kind of de-
terioration is curable. Deterioration or depreciation is curable when it is economically
feasible to remedy it, because the resulting increase in utility and value is greater than
the expenditure or cost to cure. Deterioration or depreciation is incurable when it is not
economically feasible to remedy it, because the resulting increase in utility and value is
less than the expenditure or cost to cure. Examples of deterioration that are usually curable
are replacement of a motor, sandblasting and painting of a tank, or rebuilding of a machine
tool. An example of incurable deterioration is when metal fatigue has affected a property.
When using this concept, the appraiser should strive to segregate the curable ele-
ments from the incurable elements. The primary difference between the two is that the cur-
able physical deterioration can economically be cured while the incurable portion cannot.
By segregating these elements, we are analyzing the property in two parts. The advantage
is that the portion that is curable can usually be estimated directly in dollars, providing yet
another clue in estimating physical deterioration. Those elements that are incurable must
be depreciated based on observation, “age/life,” or “use/total use” techniques described
earlier. The sum of the curable and the incurable deterioration represents the total physical
deterioration of the subject property.
Example 9: Curable and incurable physical deterioration.

The task is to appraise a crude oil tank that is part of a tank farm in an oil refinery,
under a market value in continued use concept using the cost approach. The storage
capacity requirements of a modern refinery are the same as those of the subject
with the only difference being that a modern refinery would use fewer, but larger,
individual tanks to meet those storage requirements. A replacement cost
67
Cost Approach
new is developed based on the configuration of the storage requirements of the

modern refinery. The appraiser has concluded that the replacement cost new is
approximately 10% less than the reproduction cost new for the equivalent storage
capacity. For this example, then, the replacement cost new for the individual tanks
is simply the reproduction cost new minus 10%.
The appraiser has also learned that one crude oil tank has a small leak in its
bottom because of corrosion from the saltwater that is naturally present in this
type of crude oil and this tank has been pumped out and is being prepared for
maintenance. Preliminary indications are that the entire bottom as well as the first
course of the side walls will need to be either patched or replaced, depending on
the wall thickness. The planned expenditure for this repair work is approximately
$350,000, which includes the costs associated with removing the tank from service,
cleaning, preparing a safe work environment to make the repairs, and removal and
replacement of the corroded areas.
The reproduction cost new for this tank is $2,000,000 and since replacement cost
new is 10% less than reproduction cost new, its replacement cost new is $1,800,000.
The next step is to determine the physical deterioration. In this case, we have a
physical problem that is curable: replacement or patching of the tank bottom and
portions of the side walls. The total physical deterioration of the tank should be
deducted from reproduction cost new, since this is the specific property that is
being appraised. The result, expressed as a percentage of reproduction cost new,
should be applied to replacement cost new. In this way, we are measuring the actual
physical deterioration and deducting it proportionally from replacement cost.
The first step is to deduct the cost to cure the physical problem (see Table 3.12).
Reproduction Cost New $2,000,000
Less Curable Physical Deterioration –$350,000
Reproduction Cost New of Incurable Portion of Tank $1,650,000
Table 3.12. Curable physical deterioration.
The $1,650,000 remaining is the cost of the portion of the tank subject to incurable
deterioration. The incurable deterioration may be estimated using the observation
or formula/ratio techniques described earlier.
Assume that the tank is 10 years old and that the appraiser estimates at least another
15 years of remaining physical life (remember that these areas of the tank would
not be affected by the saltwater). The total incurable physical deterioration is 40%,
or $660,000, calculated as follows:
68
Cost Approach
 10 Years Effective Age 

  x 100 =
 10 Years Effective Age + 15 Years Remaining Useful Life 
 10 
  x 100 =
 25 
( 0.40 x100 ) = 40%
Reproduction Cost New Incurable Portion $1,650,000

Incurable Physical Deterioration Percentage x 40.0%
Incurable Physical Deterioration $ 660,000
Table 3.13. Incurable physical deterioration.
The sum of the curable physical deterioration of $350,000 and the incurable physical
deterioration of $660,000 is $1,010,000, which when divided by the reproduction
cost new suggests a composite physical deterioration of 51%, as follows:
Composite Physical Deterioration =

 Curable + Incurable Deterioration 
  x 100 =
 Reproduction Cost New 
 350, 000 + $660, 000 
 2, 000, 000  x 100 =
 
0.505 x 100
= 50.5
= 51% rounded
The composite physical deterioration of 51% should then be applied against the
replacement cost new (see Table 3.14).
Table 3.14. Cost new less composite physical deterioration.
Several methods of estimating physical deterioration have been discussed, namely

observation, age/life, use/total use, and direct dollar. All are valid given certain facts,
sufficient information, and an appropriate amount of time in which to analyze the data. In
theory, all the methods should be considered, but this is not always practical. The facts and
circumstances will dictate the appropriate method or methods to be used in the appraisal
assignment.
Sources of Information for Physical Deterioration

The primary sources of information for determining physical deterioration include
historical and future capital expenditures; production records; discussions with mainte-
nance and engineering personnel; manufacturers; dealers; and service representatives. By
reviewing the historical capital expenditures, the appraiser may see that substantial money
has been spent recently on a particular asset, suggesting that it is now in reasonably good
condition. Perhaps very little money has been spent, which may be normal for that as-
set or may suggest that the asset needs major maintenance. When analyzing a company’s
budget for future expenditures, an appraiser can readily see where major expenditures are
69
Cost Approach
anticipated. These expenditures may offer clues as to which properties are approaching the
end of their useful physical lives or suffering from functional or economic obsolescence. A
review of production records will provide an indication of how particular properties have
been used. If production is down, it may be because of some physical problem. If produc-
tion is up for an extended period, this may suggest an increase in physical deterioration that
will either shorten the life of the property or require major maintenance.
There are no hard and fast rules regarding what should be ascertained when review-
ing records. Records should provide some clues and ultimately lead to the facts on which
to base an opinion. After the records have been reviewed, the appraiser should spend time
discussing conditions with various maintenance and engineering personnel. It is difficult
for an appraiser, or any outsider, to ascertain the condition of a facility without talking to
those individuals who operate and maintain the assets on a daily basis. These conversations
will help the appraiser to assemble additional information and facts upon which to base an
opinion.
A word of caution is necessary regarding future capital expenditures: when review-
ing documents like 5-year plans, it is quite common to see projections for the total re-
placement of certain properties. Often these replacements are made for reasons other than
physical deterioration, and the appraiser should strive to ascertain the reasons why those
particular properties are being replaced. Some of the future capital expenditures may be for
repair and maintenance of the existing property, and some may be earmarked for expan-
sion. If a complete replacement of a property or group of assets is planned in the future,
it may relate to the asset’s physical condition, or the replacement may be needed to solve
some functional or economic problem. If the latter is the case, then the asset scheduled for
replacement may be affected by functional or economic obsolescence.
Functional Obsolescence
The next step in implementing the cost approach is to consider functional obsoles-
cence. Functional obsolescence has been previously defined as the loss in value or useful-
ness of a property caused by inefficiencies or inadequacies of the property itself, when
compared to a more efficient or less costly replacement property that new technology has
developed. Symptoms suggesting the presence of functional obsolescence are excess op-
erating (i.e., manufacturing) cost, excess construction (excess capital cost), over-capacity,
inadequacy, lack of utility, or similar conditions.
Some appraisers draw a distinction between functional obsolescence and tech-
nological obsolescence. They define functional obsolescence as a loss in value resulting
from differences in capability between a new machine and the appraised machine, and
technological obsolescence as a loss in value resulting from the difference between design
and materials of construction used in present-day machines compared with those used in
the machine being appraised. Other appraisers refer to technological obsolescence as the
cause and functional obsolescence as the measurement, or effect. There is a legitimate dif-
ference of opinion as to how appraisers apply the concepts to measure the functional and
technological aspects affecting value. Regardless of the terms used, the important thing is
for the appraiser to measure the various factors that contribute to functional obsolescence.
70
Cost Approach
Functional Obsolescence from Excess Capital

Functional obsolescence resulting from excess capital has already been discussed.
Assuming that a property’s replacement cost is less than its reproduction cost,
which is often but not always the case,22 excess capital cost is measured by the difference
between reproduction and replacement cost. This excess cost represents the decreased
capital investment required to obtain the most economical new property to perform the
same service as the subject. Functional obsolescence due to excess capital costs results
from improvements and changes in design, materials, layout, product flow, construction
methods, and equipment size and mix. Essentially, these are the improvements that make
the new technology more desirable.
Functional Obsolescence from Excess Operating Expenses 23

The second type of functional obsolescence is that caused by excess operating or
manufacturing expenses, which will generally be referred to as operating obsolescence.
As a result of new technology, in many cases not only is it cheaper to acquire a modern
replacement property (capital cost), but it is also cheaper or more efficient to operate the
new property (operating expense). Calculating operating obsolescence involves a compari-
son of the operating characteristics of the subject property to its modern equivalent, the
property with which the subject would (hypothetically) be replaced. The existing property
or facility and its higher operating expenses are compared to the reduced expenses that
could be achieved by the modern replacement facility. From this comparison, a basis for
estimating a penalty for continuing operations of the existing property is developed.
An operating obsolescence study involves the following steps:
1. Analyze the operating statements of the subject property to determine
its operating expense per unit of production.
2. Determine the operating expenses per unit for the modern replacement
facility.
3. Determine the difference in operating expenses per unit.
4. Convert the operating expense differential into the total annual excess
operating expense that will be incurred by the subject as a result of
continued operation. This may be accomplished by applying the
operating expense differentials to projected annual capacities or by
some other method consistent with the facts and circumstances.
5. Reduce the total annual excess operating expense to reflect the effect of
income taxes on the incremental income (i.e., the additional operating
income that the modern replacement plant would achieve due to its
lower operating expense).
6. Estimate the remaining life during which the subject will continue to
be penalized by the excess operating expense (i.e., the time during
which the excess operating expenses will continue to exist).
7. Convert the annual excess operating expense to present value using an
appropriate discount rate that reflects the risk of the excess operating
expenses that are being discounted.24
71
Cost Approach
Operating obsolescence is defined as the present value of the future excess operat-
ing expenses. The subject property will continue to incur excess operating expenses, over
and above those of a modern facility, until the problem is corrected, the assets wear out, or,
in extreme cases, the company goes out of business. Essentially, the appraiser is comparing
the operating efficiency of an existing plant or asset to its modern equivalent, the modern
asset that would replace it. The replacement property should be the most economical asset
that would replace the service provided by the subject property.
Operating obsolescence is independent of any physical deterioration or functional
obsolescence due to excess capital that may affect the subject property. Some apprais-
ers incorrectly assume that operating obsolescence double counts the functional penalties.
The logic is that the appraiser has measured all functional obsolescence by starting with
replacement cost new instead of reproduction cost new. This is not correct. Starting from
replacement cost new eliminates functional obsolescence caused by excess capital costs,
but it does not take into account the future lost profits the buyer will incur after buying the
subject with its excess operating expenses.
Operating obsolescence is calculated on an after-tax basis, based on the assumption
that the excess operating expense incurred by the subject would be taxable income in the
modern plant (i.e., the modern plant would realize the excess operating expenses as ad-
ditional operating profit, which would be taxable).
The kind of operating expenses that should be investigated for the existence of
operating obsolescence are operating labor, maintenance labor and materials, operating
supplies and chemicals, raw material cost, energy and utilities, scrap and production yields.
Functional obsolescence, particularly operating obsolescence, is typically found in
the following situations:
• plants involved in the process industries;
• plants involved in industries that either use assets or manufacture products
with a high degree of technology;
• older plants that have increased in size over time;
• plants in which there are a number of identical units;
• plants involved in industries that handle large volumes of material; and
• plants with areas of inactive machinery.
Example 10: Measurement of functional obsolescence in Example 1.

Earlier in this chapter, Example 1 discussed how to determine the replacement
cost new for 4 boilers that were part of a petrochemical refinery. Now we consider
the operation of those boilers and look at the operating obsolescence (i.e., the
functional obsolescence from excess operating costs) associated with them and the
calculation of this is indicated in Table 3.15.
In addition to the information obtained in Example 1, it is discovered that 19

employees are required to operate the existing boiler facilities and that these
individuals are assigned to each boiler as indicated in Table 3.15.
72
Cost Approach
Capacity Number of
Boiler Number (pounds per hour) Employees*
1 15,000 0
2 30,000 4
3 30,000 7
4 60,000 8
Total 135,000 19
* Note: Average over a 1-year period.
Table 3.15. Employees assigned to boilers.
From the facts in Example 1 and discussions with the owners, it is learned that
the owners recently built another modern refinery in a neighboring state. The
owners indicated that the new refinery only requires 10 employees (9 less than in
the subject facility) to operate the boiler facilities. (Note that in this example, as
well as in practice, the modern equivalent is more desirable because it is cheaper
to build and, from a labor standpoint, cheaper to operate.) The 9 extra people
required in the subject facility represent additional production costs for the subject
property compared with its modern counterpart. This additional cost places the
subject at a disadvantage. This disadvantage, the annual excess operating costs,
can be quantified by multiplying the number of excess employees times the total
labor cost per employee. For purposes of this example only, assume that the direct
labor rate for each excess employee, as of the appraisal date is $25,000 per year;
and that the benefits paid by the company (insurance, FICA [Federal Insurance
Contributions Act], and other benefits) amount to 30% of the direct labor rate,
or $7,500. Therefore, the total cost per person is $32,500 per year, which equals
$292,500 per year for the 9 people. This represents the annual excess operating
cost (pre-tax) associated with the subject facility.
The next step is to convert the annual excess operating cost to present value. For
this example, assume that the boilers have a remaining useful life of 10 years, the
combined federal and state income tax rate is 40%, and the discount rate is 10%.
The operating obsolescence is estimated as shown in Table 3.16.

Annual Excess Operating Costs $292,500
Less Taxes at 40% - $117,000
Annual Excess Operating Cost After Tax $175,500
Present Value Factor of 10% for 10 Years x 6.1446*
Operating Obsolescence (Labor) $1,078,372
Rounded to
*(See Table PVA in Appendix C) $1,078,000
Table 3.16. Estimation of operating obsolescence.
73
Cost Approach
This is a relatively simple example. In practice, properly measuring operating cost

differentials requires experience and a significant amount of research. The point is that if
an individual asset, or an entire plant, produces products at a greater cost than the asset that
would replace it, then the existing asset is less desirable and hence less valuable. Analysis
of the operating obsolescence allows the appraiser to quantify the value inferiority of the
subject, when compared to its modern replacement.
Example 11: Operating obsolescence.

Example 2 illustrated a situation in which replacement cost new was greater, instead
of lower, than reproduction cost new. The primary reason for this in Example 2 was
that an advancement in technology had resulted in a replacement machine that
would produce each unit at a lower operating expense, although the replacement
machine’s capital cost (i.e., the subject’s replacement cost new) was greater than
the subject machine’s reproduction cost new. In that example, the capacity of the
subject (Model A) and its modern replacement (Model B) were both 100 units per
day. However, Model A required 100,000 British thermal units (BTUs) per year,
whereas Model B required only 75,000 BTUs per year, a difference of 25,000
BTUs. At 50 cents per BTU, Model B generates an annual operating cost savings
of $12,500 per year; or stated another way, Model A incurs excess operating
expense of $12,500 per year.
Assume the physical condition of the subject (Model A) translates to an estimated

effective age of 6 years and research suggests that the subject’s normal physical
life is approximately 15 years. Given this information, there is no reason to
conclude that the normal useful life will be shorter or greater than 15 years, which
implies a remaining physical life of 9 years (15 - 6 = 9 years). Therefore, physical
deterioration is 40% (6 ÷ [6 + 9] = 40%).
The next step is to determine the period of time during which the excess operating
expense penalty of $12,500 per year will continue to be incurred by the subject.
Discussions with the operating personnel suggest that a 9-year physical remaining
life is a reasonable estimate. The owners indicate that major expenditures will be
required at the end of the subject’s physical life to improve the physical condition
as well as its operating performance.
The owners are also aware that because of technological advancements, the subject
property is less desirable from an operating standpoint. Nevertheless, they have no
plans to replace this property in the immediate future. On the basis of these facts,
it is reasonable to conclude that the excess operating cost penalty will continue for
the remainder of this asset’s physical life, 9 years.
Assuming a 10% discount rate and a 40% income tax rate, the quantification of
operating obsolescence is as shown in Table 3.17.
74
Cost Approach
Annual Excess Operating Costs $12,500

Less Taxes at 40% -$5,000
Annual Excess Operating Costs After Tax $7,500
Present Value Factor of 10% for 9 Years*
Operating Obsolescence: Due to Energy Differences $43,193
Rounded
*(See Table PVA in Appendix C) $43,200
Table 3.17. Estimation of operating obsolescence.
Thus, using the cost approach, the Fair Market Value in Continued Use with
Assumed Earnings of Model A, the subject property in this example and example
2, is $52,800, which is developed as shown in Table 3.18. (Note that this assumes
there is no economic obsolescence.)
Reproduction Cost New (See Example 2.) $130,000

Replacement Cost New (See Example 2.) $160,000
Less Physical Deterioration: 40% -$64,000
Replacement Cost New Less Physical Deterioration $96,000
Less Functional Obsolescence From Excess Operating Costs -$43,000
Replacement Cost New Less Physical Deterioration and
Functional Obsolescence $52,800
Less Economic Obsolescence -$0
Fair Market Value in Continued Use with Assumed Earnings $52,800
Table 3.18. Fair Market Value in Continued Use with Assumed Earnings.
Example 11 raises several points requiring further discussion. For purposes of

illustration, we have assumed that the annual excess operating cost of $12,500
will remain constant during the 9 remaining years; that is, we are assuming that
production and the cost of energy will remain constant. In reality, it is often the
case that operating cost differentials do not remain constant. If they do not remain
constant, the appraiser will need to determine the present value of each year’s
operating cost differential. Furthermore, in theory the discount rate should reflect
the assumptions, including the risk, inherent in the projections and income stream
that are the basis for the operating cost differential, which in Example 11 would be
the projections of future energy costs and production. If the risk inherent in these
projections is higher or lower than the risk inherent in the subject plant’s normal
operations, the discount rate used to estimate operating obsolescence should be
increased or decreased to reflect the different level of risk.25
There can also be a problem when analyzing operating costs of facilities operating at
significantly reduced capacities. Those elements that contribute to operating obsolescence
are known as variable operating costs; that is, they vary with production. For example,
to produce a given product, “x” amount of energy, “y” amount of labor, and “z” amount
of raw material are required. At or near full capacity there is a linear (direct) relationship
between the amount of input and the amount of output. However, at some lower operating
75
Cost Approach
level, the relationship becomes distorted and is no longer linear for all elements. This re-
sults in greater operating costs per unit of output. Further discussion of this topic is beyond
the scope of this book, but the appraiser should be aware that distortions can occur.
Example 11 illustrates a situation in which the higher capital cost of the modern
replacement asset is more than offset by its lower operating expense, as compared to the
less efficient subject asset. In Example 11 there were sufficient data to draw an objec-
tive conclusion of value, using the cost approach, for that particular asset. However, in
some cases there may be a dramatically higher capital cost without any offsetting savings
in operating expense. This is especially true when appraising properties with pollution
abatement equipment or with equipment that has been affected by a change in pollution
control regulations. For example, consider an appraisal of a dust collection system that
was designed for particulate emission of 100 PPM (parts per million), where the facility
operates within its designed capability. Assume that a new government regulation states
that all new dust collection systems can emit only 50 PPM, that this requirement effectively
doubles the capital cost and that it will also necessitate higher energy and labor expense to
meet the new requirement. Furthermore, assume that the existing dust collection systems,
including the one being appraised, will remain in operation under a “grandfather” clause
in the regulation that will permit the facility to function without meeting new government
ordered standards. The question here is: What is the proper level of current cost for the
dust collection system being appraised? The answer is the reproduction cost new of the
subject facility, because the specifications for the modern facility are far greater than those
for the subject facility. In fact, in this example, there is no modern equivalent because of
the regulations. In addition, a prudent investor is not going to build the newer dust collec-
tion system without realizing some economic benefit (for example, reduced costs and/or
improved quality), or without being legally required to do so, as in this case.
Economic Obsolescence
The last step in the implementation of the cost approach is to estimate economic
obsolescence. Economic obsolescence (sometimes called “external obsolescence”) has
been previously defined as the loss in value or usefulness of a property caused by fac-
tors external to the asset. These factors include increased cost of raw materials, labor, or
utilities (without an offsetting increase in product price); reduced demand for the product;
increased competition; environmental or other regulations; or similar factors.
The difficulty in measuring the full effect of economic obsolescence is one of the
weaknesses of the cost approach. Because economic obsolescence is usually a function
of outside influences that affect an entire business (i.e., all tangible and intangible assets)
rather than individual assets or isolated groups of assets, it is sometimes measured using
the income approach or by using the income approach to help identify the existence of
economic influences on value. However, the cost approach can be used to measure some
forms of economic obsolescence.
Inutility
The cost-to-capacity concept, discussed earlier in this chapter, can be used to esti-
mate one form of economic obsolescence within the cost approach. Whenever the operat-
ing level of a plant or an asset is significantly less than its rated or design capability, and
76
Cost Approach
the condition is expected to exist for some time, the asset is less valuable than it would
otherwise be. Such a penalty for inutility can be a measure of the loss in value from this
form of economic obsolescence.
There are at least two methods of measuring this loss of value using the cost ap-
proach. The first method, which is illustrated below, assumes there is no fixed expense
associated with the plant or production line of which the subject is a part. This is an unre-
alistic assumption in most situations. Unless fixed expense is zero, the method illustrated
below may significantly underestimate the inutility penalty. If the fixed expense of a plant
or of a production line is not zero, the second method should be considered.26
The first method measures the loss in value by reducing the capital investment from
rated capability to the actual operating level to “balance” the plant. For example, assume
that the task is to appraise a property that has a rated or design capacity of 1000 tons/day,
but it is operating at only 750 tons/day because of reduced demand for the product or
other unfavorable external conditions. If the replacement cost new is developed based on
1000 tons/day and the operating cost penalties are discounted at 750 tons/day, an obvious
imbalance exists. That imbalance is the unused capacity reflected in the replacement cost
new estimate but not reflected in the operating obsolescence. This unused or unproductive
capacity should be reflected in the depreciation estimate.
The inutility penalty can be calculated on a percentage basis by comparing the
actual operating level to the rated capacity using the following formula:
  Capacity B  x 
Inutility as a percent formula = 1 −    x 100 =
  Capacity A  
Where Capacity A = Rated or design capacity
Capacity B = Actual production
x = Exponent or scale factor
(Note: If the exponent “x” is not available from published sources, it can be deter-
mined as shown in Example 6.)
This formula is based on the cost-to-capacity concept discussed earlier in this
chapter, wherein the cost of facilities of different capacities vary exponentially rather than
linearly because of economies of scale. In other words, as capacity increases, cost also
increases but at a different rate. This same logic is used to develop the inutility penalty. As
discussed earlier, scale factors vary depending on the type of equipment and labor/material
ratios.
Again, the primary purpose is to balance the plant from both a capital and operat-
ing cost basis. Continuing with the example given above, if the operating obsolescence
is discounted to the present value based on 750 tons/day, then the actual inutility is the
250 tons/day that is not operating. Under the principle of substitution, a prudent investor
would not purchase this unproductive capacity without being able to realize some benefit.
If the plant is not operating at capacity for economic reasons, the inutility is caused by eco-
nomic obsolescence. If there is an imbalance in the productive capacity (e.g., a production
bottleneck), the inutility is caused by functional obsolescence. Finally, although it is not
common, if a property is not operating at capacity because of some physical problem, the
77
Cost Approach
inutility is caused by physical deterioration. A plant operating at close to its full capacity
doesn’t necessarily indicate that economic obsolescence is zero. If the plant is operating
at full capacity, but not earning at a level similar to the past or not returning a reasonable
return on the investment in the plant, economic obsolescence still may exist. Once again,
the appraiser should determine the facts and circumstances and apply them as appropriate.
Example 12: Inutility—measuring economic obsolescence within the cost

approach.
The subject to be appraised is a production line capable of 1,000 units per day. It is
approximately 3 years old and is in excellent condition. The subject line represents
the state of the art from a technological point of view. The owners indicate that
there has been a dramatic increase in foreign competition and, consequently, the
subject production line is currently operating at only 750 units per day.
Assume that the current replacement cost new for a plant with a capacity of 1,000
units per day is $1,000,000; that the proper scale factor for this kind of facility is
0.7; and assumed that the physical deterioration is 15%. The task is to measure the
additional depreciation (obsolescence) attributable to the reduced production.
The reduced operating level is an element of economic obsolescence since it

is caused by factors external to the property. In this case, the application of an
economic inutility penalty is appropriate and is developed as follows:
  750 0.7 
Inutility as a percentage = 1 −    x 100 =
  1, 000  
(1 − .818) x 100 =
0.1820 x 100 = 18.2%
The determination of the Fair Market Value in Continued Use with Assumed
Earnings of this production line, using the cost approach, is summarized as shown
in Table 3.19.
Replacement Cost New $1,000,000

Less Physical Deterioration at 15% (given) -$150,000
Less Functional Obsolescence From Excess Operating Costs -$0
Replacement Cost New Less Physical Deterioration and Functional
Obsolescence $850,000
Less Economic Obsolescence Calculated at 18.2% -$154,700
Fair Market Value In Continued Use with Assumed Earnings $695,300
Rounded $700,000
Table 3.19. Measuring inutility within the cost approach.
In the preceding example, there are several points worth discussing. First, notice
that the inutility penalty is not linear: a 25% decrease in operating capacity results in an
18.2% inutility penalty. Second, the penalty was deducted after physical deterioration and
functional obsolescence (there was no functional obsolescence in this example) because
78
Cost Approach
economic obsolescence is independent of physical deterioration and functional obsoles-

cence. Third, a valid question can be raised regarding the proper capacity to use as the
basis for developing replacement cost new. If the economic conditions are such that the
long-term production will be 750 units per day, it may be valid to calculate replacement
cost new based on a 750-unit-per-day plant instead of the 1,000-unit-per-day plant used in
the example.
Developing an inutility penalty is a way of measuring one form of economic ob-
solescence within the cost approach. In practice, when dealing with relatively new assets
that are not operating at their capacity because of economic reasons, additional economic
obsolescence is probably present. To measure this may require a detailed analysis of the
business and a subsequent allocation of any economic penalties to the individual assets or
groups of assets.
Other Methods of Measuring Economic Obsolescence Within the

Cost Approach
Unfavorable external factors may cause the subject plant or asset to incur excess
operating costs. These excess operating costs, caused by external instead of internal fac-
tors, can be measured and converted into an economic obsolescence penalty using the same
methods discussed under operating obsolescence (see Examples 10 and 11).
An example would be the significantly higher raw material costs experienced by
paper mills and other forest products facilities in the Pacific Northwest in the 1990s. Higher
raw material costs were caused primarily by court decisions in environmental cases that
had the effect of substantially restricting the supply of raw material, thereby raising raw
material costs for paper mills and other forest products mills in the Pacific Northwest. The
raw material costs of paper mills in other parts of the United States, with which the Pa-
cific Northwest mills competed, were not affected by the court decisions. Since the Pacific
Northwest mills were not able to pass on the increased cost to their customers (because the
paper market is national or global), these mills experienced substantial excess operating
costs, when compared to mills with which they competed that were not affected by the court
decisions. These excess operating costs, caused by external forces, could be measured and
converted into an economic obsolescence penalty using the same methodology presented
in our discussion of operating obsolescence.
Other methods are available for quantifying economic obsolescence within the cost
approach. While a discussion of these methods is beyond the scope of this book, it should
be noted that other measures of economic obsolescence can be developed based on the
following:
• Analyses of industry returns—compare the returns on invested capital in the
industry the subject property operates in to returns of general or all industries.
• Supply/demand relationships—determine if competition is increasing because
of a surplus of supply or a decline in demand, causing margins to decline; de-
velop a relationship showing a supply/demand imbalance or a trend showing
increasing supply over demand.
• Gross margin analysis—compare the gross margins (product price less raw
material cost) of the past to current gross margins, show how gross margins
are declining.
79
Cost Approach
• Product or raw material price changes—show how margins are declining be-
cause the product price is stable, while the raw material prices are increasing,
resulting in a decline in earnings (see gross margin analysis above).
• Stock prices—compare the stock price of companies in the subject industry
to a benchmark such as the company net book to a similar ratio in the general
market to show a lower stock price/net book ratio for stocks in the subject
industry.
• Sales transactions—calculate the magnitude of economic obsolescence for
a similar property acquired in the market by comparing the cost indicator of
value prior to deducting economic obsolescence to the actual sales price. (The
difference is economic obsolescence.)
• The relationship between replacement cost new and the cash flows the hypo-
thetical replacement facility is capable of generating27—compare the replace-
ment cost new to the income indicator of value for the same property; the
difference is economic obsolescence.
• Other economic evidence indicating that the value of the subject property has
been reduced by external factors—look for indications of reduced earnings,
reduced utilization, changes in use, idle or shutdown plants in the industry or
a restructuring within the industry, among others.
As long as appraisers objectively examine the facts, apply appropriate analytical
methods, and avoid double-counting depreciation, they are limited only by their resource-
fulness and creativity.
Remaining (or Aggregate) Obsolescence Factor

Many times it is difficult, or unreasonable, to individually calculate both functional
and economic obsolescence for every asset in an appraisal. Although data may not be
available for individual calculations, indicators may be available in the market-place to
calculate an aggregate obsolescence factor within the cost approach.
At times it becomes necessary to make an obsolescence adjustment in the cost
approach in order to determine a final answer for all depreciation that may not be readily
apparent from the appraiser’s research into a particular asset. A remaining obsolescence
factor (ROF) or an aggregate obsolescence factor can be quantified by comparison between
the results obtained through the use of a cost indicator of value prior to the deduction for
obsolescence and results obtained through the use of the sales comparison approach. This
is a market derived obsolescence analysis.
In order for this methodology to be used effectively, replacement cost new data and
fair market value data for a sample of assets similar to the subject assets must be gathered.
Such a comparison is necessary to reconcile any potential differences between the cost
approach and actual market data obtained from comparable sale transactions.
The most accurate and supportable results of this process will be realized if the
analysis breaks the assets down into various asset-specific categories (i.e., production
equipment, packaging equipment, conveyors, maintenance equipment, etc.) and develops
remaining obsolescence factors for each of the various categories. However, it is also pos-
sible to use this technique to develop plant-wide or process-wide factors, as long as the
80
Cost Approach
sample used is significant and contains a relevant sample of assets used in the process or
plant. The former method is preferred and is necessary for facilities that have a variety of
different types of equipment, while the latter can be used when the process or facility has
assets that are similar in nature or when the assets are all part of a continuous process.
The process of quantifying this type of remaining obsolescence using market-based
data includes the following steps:
1. Determine the replacement cost new and actual used sales price,
asking price, or auction sales price for a sample grouping of assets.
2. Adjust the used sales prices (see discussion in the Sales Comparison
Approach, Chapter 4, for specifics on how these adjustments are
made) as applicable.
3. Apply physical depreciation and any known functional or economic
obsolescence adjustments to the replacement cost new of the sample
of assets, as applicable, in order to arrive at a cost indicator or tentative
fair market value of the asset utilizing the cost approach.
4. Subtract the used sales price from the cost indicator or tentative fair
market value of the asset (using the cost approach). The resultant is
the remaining obsolescence amount for that particular asset.
5. Divide the remaining obsolescence amount by the cost indicator or fair
market value of the asset (using the cost approach). This step converts
the remaining obsolescence amount into a percentage adjustment.
6. Analyze the various remaining obsolescence factor percentage
adjustments to arrive at a conclusion of the remaining obsolescence
factor for that sample grouping of assets.
Once the average remaining obsolescence factor is calculated, it can be used to
adjust assets similar to the sample grouping and for which the cost approach was used.
When using this technique it is important to make sure that the replacement cost
new and the market data obtained both either consider, or do not consider, the effects of
installation, shipping, engineering, and any indirect costs. The results of this methodology
can become skewed and misleading if costs such as these are erroneously included in one
of the amounts and not in the other. The following Example 13 explains this process.
Example 13: Calculating the remaining obsolescence factor within the cost
approach.
The task is to appraise an ABC Company can seamer, model 100 that was built
in 2000 and is in good condition. The subject’s maintenance history allows for an
assumption that the physical deterioration factor should be 70%.
The ABC Company indicates that the replacement cost new of a comparable new
unit, uninstalled, is $400,000 as of the effective date of the valuation. Also, it has
been validated that there is no significant functional obsolescence present, and
thus, no functional obsolescence adjustment is necessary.
81
Cost Approach
Based on research in the used marketplace, it is found that used equipment dealers
have been selling comparable units for $66,000, uninstalled, as of the effective
date of the valuation. For purposes of this example, assume that there are no
adjustments necessary to bring the comparable in line with the subject and thus
it may be concluded that the fair market value as of the effective valuation date
equates to the $66,000 amount.
Also, assume that even with research, it cannot be factually established through
traditional calculations whether or not there is any applicable economic
obsolescence and therefore on a preliminary basis it is assumed that the economic
obsolescence is zero.
The subject may be estimated by using the cost approach as shown in the following
Table 3.20:
Replacement Cost New $400,000

Less Physical Deterioration @70% -$280,000
Replacement Cost New less Physical Deterioration $120,000
Less Functional Obsolescence -$0
Replacement Cost New less Physical Deterioration and
functional obsolescence $120,000
Less assumed Economic Obsolescence -$0
Replacement Cost New less all depreciation and specific
obsolescence using the Cost Approach (“RCNLD”) $120,000
Table 3.20. Calculation of “RCNLD.”
However, research indicates that comparable units are selling in the applicable
market place for $66,000. Therefore, the above calculations are not accounting
for some remaining obsolescence. In order to quantify the remaining obsolescence
factor (ROF), the following formula may be used:
 RCNLD - FMV 
ROF =  
 RCNLD 
 $120,000 - $66,000 
ROF =  
 $120,000 
 54,000 
ROF =  
 120,000 
ROF = 45%
Where:
ROF = Remaining Obsolescence Factor
FMV = Fair Market Value
RCNLD = Replacement Cost New (RCN) Minus Known or Estimated
Depreciation (LD)
Table 3.21. Calculation of remaining obsolescence factor.
82
Cost Approach
Therefore, the adjustment for all remaining obsolescence, including economic, in

the cost approach, would have to be 45% in order to yield a value indication of
$66,000, which is the value that was concluded from the market data. Naturally, a
fundamental disparity can arise in the final remaining obsolescence factor based
upon the accuracy of the amounts allotted for physical deterioration and functional
obsolescence. Nevertheless, regardless of what these amounts are, or to what the
loss in value is, the overall total loss in value is what is relevant.28 The use of
remaining obsolescence factor calculations can be used for other similar items
using the information as established in Table 3.21.
The resultant 45% obsolescence factor is calculated based on the specific $66,000
used selling price. There may be differing obsolescence factors for each comparable
sale (as adjusted) in the used market place. Therefore, the appraiser must obtain
a sufficient amount of data to determine an acceptable remaining obsolescence
factor for the machinery being appraised.
Example 14 Application of the data obtained in Example 13.

The task is to appraise an ABC Company can seamer, model 120 which was built
in 2000 and is in good condition. The subject’s maintenance history allows for an
assumption that the physical deterioration factor should be 65%.
The ABC Company indicates that the replacement cost new of a comparable
new unit, uninstalled, is $420,000 as of the date of the valuation. Also, the ABC
Company has validated that there is no significant functional obsolescence present,
and thus, no functional obsolescence adjustment is necessary.
Replacement Cost New $420,000

Less Physical Deterioration @ 65% -$273,000
Less Functional Obsolescence -$0
Replacement Cost New Less Physical Deterioration and Functional $147,000
Obsolescence (RCNLD)
Table 3.22. Application of remaining obsolescence factor.
The preceding Example 14 and Table 3.22 show how data may be used from one
specific asset to calculate an obsolescence adjustment factor for another specific asset. The
same process can also be used to calculate a remaining obsolescence factor for a group of
subject assets. In the case of a group of subject assets, the more comparable data that can
be analyzed, the more accurately the remaining obsolescence factor may be calculated.
When calculating a remaining obsolescence factor for a group of assets, it is im-
perative to segregate the subject assets into groupings of like assets such as those with
similar functionality and/or similar market characteristics. In addition, care must be taken
to assure that the assets used as comparables (i.e. those used to arrive at the obsolescence
factor) are similar in functionality and market characteristics. If both the subject assets and
the comparable sales are not segregated into similar groupings, the resulting obsolescence
factor may not be relevant and will produce an answer that may be inaccurate. As an obvi-
83
Cost Approach
ous example, it would be improper to use a group of milling machine sales to compute the
remaining obsolescence factor to be used in valuing a group of cranes, unless, of course,
you are able to determine that cranes are treated in the used marketplace in a similar man-
ner as milling machines with respect to obsolescence.
Example 15: Using a sample of comparable sales to calculate theremaining

obsolescence factor for a larger group of similar assets.
The task is to value a series of 10 XYZ Company double-screw steam heated cookers
of various ages and capacities as part of an appraisal of a food manufacturing plant.
The replacement cost new data on all 10 of the subject cookers was assembled from
the manufacturer. Physical deterioration and functional obsolescence penalties
were then calculated for each of the 10 cookers.
A search of the used market resulted in three comparable sales that are the same as
3 of the 10 subject units being appraised and these are shown in Table 3.23 below.
Concluded FMV-Sales
Description Manufacturer Condition Comparison Approach*
Cooker, 6,000 lbs. XYZ
CAP Company F–G $70,000
CAP Company F $30,000
CAP Company G $85,000
*Represents amounts after all adjustments are made as required by the Sales
Comparison Approach, Chapter 4.
Table 3.23. Comparable sales.
Analysis of the cost approach for these 3 cookers resulted in the following data
presented in Table 3.24:
Phys Det
Qty Description RCN (% Good) Func Obs RCNLD
1 Cooker, 6,000 lbs. CAP $200,000 40% 0% $80,000
1 Cooker, 2,000 lbs. CAP $125,000 30% 0% $37,500
1 Cooker, 4,000 lbs. CAP $170,000 60% 0% $102,000
Table 3.24. Calculation of cost approach depreciation.
By aligning the results of the cost approach with those of the sales comparison
approach, the following can be established:
84
Cost Approach
Sales
Cost Approach Comp.
Phys
Depr. Implied
(% Func Remaining
Qty Desc Mfr. Cond RCN Good) Obs RCNLD FMV Econ. Obs.
Cooker, 6,000
1 lbs. CAP XYZ Co. F–G $200,000 40% 0% $80,000 $70,000 12.5%
Cooker, 2,000
1 lbs. CAP XYZ Co. F $125,000 30% 0% $37,500 $30,000 20.0%
Cooker, 4,000
1 lbs. CAP XYZ Co. G $170,000 60% 0% $102,000 $85,000 17.56%
(A) (B) = (A-B)/A

Total 219,500 185,000 15.72%
Table 3.25. Cost approach and sales comparison approach.
As seen in the tables, the implied remaining obsolescence factor ranges from
12.5% to 20.0%. The aggregate average implied remaining obsolescence factor
is 15.72%. The average of the indicated remaining obsolescence factor is 16.39%
(12.50% + 20.00% + 16.67%) / 3).
The concluded remaining obsolescence factor of approximately 15.72%, rounded

to 16.0%, can then be applied to the other 7 double-screw cookers that need to be
valued in order to conclude a fair market value of each cooker.
A Special Note on Obsolescence

The appraiser should be aware when using market data as a measure of obsoles-
cence that there exists a potential of “double dipping” on obsolescence. As an example,
if market data from sales of certain machines suggests depreciation, or obsolescence, in
excess of physical deterioration, this obsolescence represents an aggregate or sum of func-
tional obsolescence (if present in the machine) and economic obsolescence. If the appraiser
cannot determine the extent of functional obsolescence inherent in the market transaction,
the resultant measure of obsolescence is an aggregate obsolescence. The appraiser can-
not use the aggregate obsolescence as a measure of simply the economic obsolescence
(or remaining obsolescence) for a subject machine for which the appraiser has already
calculated functional obsolescence. As in many instances, each appraisal is based on the
facts and circumstances of that specific appraisal, and the appraiser needs to consider each
step of the appraisal process to confirm that the methods used do not provide an erroneous
conclusion of value.
Fair Market Value in Continued Use (with Assumed Earnings or with an Earnings Analysis)
The previous examples of arriving at a conclusion of fair market value in contin-
ued use included an assumption that there are sufficient business earnings to support the
value conclusion as to the assets in question, hence the qualifier of Fair Market Value in
Continued Use with Assumed Earnings. Another option is to use income approach methods
to actually determine whether there are sufficient earnings to conclude Fair Market Value
85
Cost Approach
in Continued Use with an Earnings Analysis. More detailed discussions of utilizing an

earnings analysis can be found in Chapters 4 and 5.
If an earnings analysis supports the value conclusions, there would be no additional
obsolescence and the resultant value conclusion would be Fair Market Value in Continued
Use with an Earnings Analysis. On the other hand, if an earnings analysis would suggest
support for some lower value, it would be evidence of additional economic obsolescence
specific to the subject business enterprise, and that obsolescence would need to be deducted
to arrive at a conclusion of Fair Market Value in Continued Use with an Earnings Analysis.
Without such an analysis, the concluded value would be Fair Market Value in Continued
Use with Assumed Earnings. Either can be considered valid appraisal conclusions
Sequence of Depreciation
We have discussed the cost approach using a very distinct sequence or order: current
cost new less physical deterioration, functional obsolescence, and economic obsolescence.
This is the generally accepted method for deducting the elements of depreciation
from the cost new and therefore the traditional sequence of the cost approach is as shown
in the following Table 3.26:
Step 1: Reproduction Cost New

Less Excess Capital Cost
Equals Replacement Cost New
Step 2: Replacement Cost New (RCN)

Less Physical Deterioration
Equals RCN Less Physical Deterioration (RCNLPD)
Step 3: RCNLPD
Less Functional Obsolescence
Equals RCNLPD and Functional Obsolescence
(RCNLPD and FO)
Step 4: RCNLPD and FO

Less Economic Obsolescence
Equals Replacement Cost New Less All Forms of
Appraisal Depreciation
Table 3.26. Traditional sequence of the cost approach.
The following Example 16 depicts how the traditional cost approach sequence of
depreciation is applied.
86
Cost Approach
Example 16. Application of Traditional Cost Approach Sequence of

Depreciation.
Assume that the following has already been established by the appraiser:
Reproduction Cost New = $150,000
Excess Capital Cost = – $10,000
Replacement Cost New = $140,000
Physical Deterioration = 50%
Functional Obsolescence = 20%
Economic Obsolescence = $16,000
The traditional cost approach calculations would then be as follows:
Reproduction Cost New = $150,000
Less Excess Capital Cost = – $10,000
Replacement Cost New = $140,000
Less Physical Deterioration @ 50% = – $70,000
$70,000
Less Functional Obsolescence @ 20% = – $14,000
$56,000
Less Economic Obsolescence = – $16,000
Replacement Cost New less all Depreciation $40,000
Example 16 reflects the traditional methodology for the cost approach. It is impor-
tant to recognize that after each calculation a new subtotal is derived. All of the forms of
depreciation — physical deterioration, functional obsolescence, and economic obsoles-
cence — are deducted in the order and manner shown above. They are not added together
or combined and then deducted from cost new.
The logic behind the sequence is derived from the normal life cycle of a property.
When a property is new, its value is usually equal to the sales price. There are a willing
buyer and seller, implying that an economic justification (a business need of some kind)
for the purchase of the property exists. Once the property is placed in service by the buyer,
it begins to depreciate. Usually the first element of depreciation that occurs is physical
deterioration, since the property will probably be used for the purpose for which it was
purchased. As the property continues in operation, two elements of deterioration come into
play, curable and incurable. Curable deterioration is usually correctable through routine
maintenance, while incurable deterioration begins in the form of metal fatigue (or some
similar condition) and cannot be remedied. Physical deterioration is the only element of
depreciation that affects the item until something happens in the marketplace or environ-
ment to trigger functional or economic obsolescence. Usually an equipment manufacturer
will improve the asset gradually over time, so when the manufacturer announces a “new
and improved” version of the asset, obsolescence is usually introduced into the existing as-
set. Normally the new version incorporates some technological improvements, suggesting
87
Cost Approach
that functional obsolescence affects the value of the existing asset. At this point the asset is
operating, is physically deteriorating, and now exhibits some functional obsolescence. As
time goes on, external factors such as reduced profitability in an industry, increased compe-
tition, foreign imports, a shift in market demand, or new government regulations cause the
item to experience some form of economic obsolescence. Thus, economic obsolescence is
usually the last element of depreciation to affect the property.
This is the normal sequence for calculating and applying depreciation when using
the cost approach. The rationale for calculating depreciation in this sequence is that it, in
most instances, accounts for depreciation in the order that it occurs. However, there may
be occasions when the facts or economic logic will dictate that the sequence of deductions
from cost new should be different. It should also be noted that when a deduction is made
for excess capital costs (the difference between reproduction and replacement cost new),
one is deducting a form of obsolescence before considering any other forms of deprecia-
tion. The most important point, however, is that when using the cost approach, an appraiser
should strive to segregate the various elements of depreciation and avoid doubling-up on
or omitting some form of depreciation.
The sequence of deductions in the cost approach is also affected by the methodol-
ogy used to derive the depreciation amounts. Mathematically, the order of the percentage
deductions is not important; the result will be the same. The sequence of deductions must
be consistent with the development of the deductions.29
Key Points
• Using the cost approach, the appraiser starts with the current replacement cost of
the property being appraised and then deducts for the loss in value caused by physi-
cal deterioration, functional obsolescence, and economic obsolescence. The logic
behind the cost approach (as well as the sales comparison and income approaches)
is the principle of substitution: a prudent buyer will not pay more for a property
than the cost of acquiring a substitute property of equivalent utility. The principle
can be applied either to an individual asset or to an entire facility.
• The replacement cost new is the proper starting point for developing an opinion of
value using the cost approach unless some situation, condition or reasoning would
indicate otherwise.
• It is essential that the appraiser understand the difference between replacement cost
new and reproduction cost new. Replacement cost is the current cost of a similar
new property with utility equivalent to the subject property, whereas reproduction
cost is the current cost of producing a new replica of the subject. When using the
cost approach, the appraiser is comparing the property that would replace the sub-
ject to the subject property. The modern replacement property would be the most
economical new property that could replace the service provided by the subject.
• There are several methods of determining the current new cost of a property. The
major ones are the detail method, trending, cost-to-capacity, and other engineering
methods.
88
Cost Approach
• The detail method, also known as the summation method, requires that a current
new cost be assigned to each individual component of a property. The property is
itemized or “detailed” so that the sum of the components reflects the cost new of
the whole.
• Trending is a method of estimating a property’s reproduction cost new (not replace-
ment cost new) in which an index derived trend factor is applied to the asset’s
historical cost to convert the known cost into an indication of current cost.
• Appraisal depreciation has been defined as the difference in value between an
existing old asset and a new asset taken as a standard of comparison. Appraisal
depreciation should measure value inferiority.
• The 3 types or causes of appraisal depreciation traditionally recognized by apprais-
ers are physical deterioration, functional obsolescence, and economic obsolescence.
• Physical deterioration is a form of depreciation where loss in value or usefulness
of a property is due to the using up or expiration of its useful life caused by wear
and tear, deterioration, exposure to various elements, physical stresses, and similar
factors.
• Functional obsolescence is a form of depreciation in which the loss in value or
usefulness of a property is caused by inefficiencies or inadequacies of the property
itself, when compared to a more efficient or less costly replacement property that
new technology has developed. Symptoms suggesting the presence of functional
obsolescence are excess operating cost, excess construction (excess capital cost),
over-capacity, inadequacy, lack of utility, or similar conditions.
• Economic obsolescence (sometimes called “external obsolescence”) is a form of
depreciation where the loss in value of a property is caused by factors external
to the property. These may include such things as the economics of the industry;
availability of financing; loss of material and/or labor sources; passage of new leg-
islation; changes in ordinances; increased cost of raw materials, labor, or utilities
(without an offsetting increase in product price); reduced demand for the product;
increased competition; inflation or high interest rates; or similar factors.
• Three methods of measuring physical deterioration that were discussed are obser-
vation, formula/ratio, and direct dollar measurement.
• In the observation method, the appraiser makes a comparison based on the experi-
ence gained by looking at similar properties and comparing them to new properties.
• In one variation of the formula/ratio method, physical deterioration is estimated
based on a property’s use. Use is a good indicator of physical deterioration when
the requisite production statistics can be obtained.
• The age/life variation of the formula/ratio method uses the ratio of a property’s
“age” to its “life” to measure physical deterioration. Although this is straight-line
depreciation, it should not be confused with accounting depreciation, because the
appraiser uses valuation concepts of age and life.
89
Cost Approach
• Functional obsolescence resulting from excess capital costs is measured by the

difference between reproduction and replacement cost (assuming replacement cost
is lower). This excess cost represents the decreased capital investment required to
obtain the most economical new asset to perform the same service as the subject.
Functional obsolescence due to excess capital costs results from improvements that
make the new technology more desirable, such as changes in design, materials,
layout, product flow, construction methods, and equipment size and mix.
• A second type of functional obsolescence is that caused by excess operating ex-
penses. As a result of new technology, in many cases not only is it cheaper to acquire
a modern replacement asset (capital cost), but it is also cheaper or more efficient
to operate the new asset (operating expense). Calculating operating obsolescence
involves a comparison of the operating characteristics of the subject property to its
modern equivalent, the property with which the subject would (hypothetically) be
replaced.
• The reduced costs being achieved by the modern replacement property are com-
pared to the existing property or facility and its higher operating expenses. From
this comparison, a basis for estimating a penalty for the continued use of the exist-
ing property is developed.
• The difficulty in measuring the full effect of economic obsolescence is one of
the weaknesses of the cost approach. Because economic obsolescence is usually
a function of outside influences that affect the entire business (i.e., all tangible
and intangible assets) rather than individual assets or isolated groups of assets, an
earnings based approach is frequently used to estimate economic obsolescence.
However, the diligent and resourceful appraiser can usually find a way to apply the
cost approach to most, if not all, forms of obsolescence.
• The cost-to-capacity concept can be used to estimate one form of economic ob-
solescence within the cost approach. Whenever the operating level of a plant or
an asset is less than its rated or design capability, the asset is less valuable than it
would otherwise be. An inutility penalty can be used to measure the loss in value.
• Unfavorable external factors may cause the subject plant or asset to incur excess
operating costs. These excess operating costs, caused by external instead of internal
factors, can be measured and converted into an economic obsolescence penalty
using the same methods presented in our discussion of operating obsolescence.
Additional Reading
Appraisal Institute. The Appraisal of Real Estate. 13th ed. Chicago: Appraisal Institute,
2008.
Babcock, Henry A., FASA. Appraisal Principles and Procedures. Washington, DC: Ameri-
can Society of Appraisers, 1989, Published by Richard D. Irwin, Homeware, IL 1968.
Bonbright, James C. The Valuation of Property. Reprint, Charlottesville, VA.: The Michie
Company, 1965, Vols. 1, 2 and 4, LCCN 37003401.
90
Cost Approach
Grant, Eugene L., and Paul T. Norton, Jr. Depreciation. Revised printing, New York:
TheRonald Press Company, 1955, LCCN 55006997.
Humphreys, K., and S. Katell. Basic Cost Engineering. New York: M. Dekker, September
1995.
Marston, Anson, Robley Winfrey, and Jean C. Hemstead. Engineering Valuation and De-
preciation. Iowa City: Iowa State University Press, 1953, Ames, IA, LCCN52008322.
Notes
1
The Appraisal of Real Estate, 12th ed., p. 336, Appraisal Institute, 550 W. Van Buren Street, Suite 1000, Chicago, IL 60607; (312)
335-4100, fax (312) 335-4400; www.appraisalinstitute.org; James C. Bonbright, The Valuation of Property, Vols. 1, 2 and 4, 1965,
Reprint by Michie Company, Charlottesville, VA, p. 157, LCCN 37003401. It should be noted that the underlying concept of the sales
comparison and income approaches is also the principle of substitution although the income approach is more deeply rooted in the
principle of anticipation.
2
Bonbright, The Valuation of Property, Vols. 1, 2 and 4, 1965, Reprint by Michie Company, Charlottesville, VA, LCCN37003401; Grant
and Norton, Depreciation, revised printing, New York: The Ronald Press Company, 1955, LCCN55006997; and Svoboda, Robert S.,
“Fair Market Value Concepts” In Appraising Machinery and Equipment (sponsored by American Society of Appraisers, 555 Herndon
Parkway, Suite 125, Herndon, VA 20170, McGraw-Hill Book Company, LCCN 88013226, www.appraisers.org).
3
The terms replacement cost new and reproduction cost new are both often abbreviated as RCN. Appraisers must exercise caution
when abbreviating these terms so that the reader of an appraisal report is not confused or mislead as to which term the writer is actually
referring to.
4
Ibid.
5
Bonbright, The Valuation of Property, Vols. 1, 2 and 4, 1965, p. 163, reprint by Michie Company, Charlottesville, VA LCCN37003401;
bracketed material has been added.
6
Grant and Norton, Depreciation, p. 277, revised printing, New York: The Ronald Press Company, 1955, LCCN55006997; bracketed
material has been added.
7
Replacement cost new is often less than reproduction cost new, but this is not always the case as is the case where “betterment” occurs
(see Example 2, p. 51).
8
A 10% per year trend factor is used for illustration purposes only.
9
This operating cost will continue for the life of the asset as explained in greater detail in Example 10.
Note: The calculation of the belting in this example requires the estimation of the belting for not only the active part of the conveyor
10
but also the return belt and the portion around the end drums.
Circumference = πxD
Circumference of head = π(3.14) × 10” = 31.40”
and then multiply by 0.5 for only ½ of drum = 15.70”
Circumference of tail = π(3.14) × 6” = 18.84”
and then multiply by 0.5 for only ½ of drum = 9.42”
Total = 25.12” (Say 2’)
Then (2’ × 21.5’) = 43’ (Say 45’)
11
The definitions of historical cost and original cost used in this book are consistent with accepted appraisal terminology (see the
Dictionary of Real Estate Appraisal, 4th ed., pp. 150 and 216, Appraisal Institute, 550 W. Van Buren Street, Suite 1000, Chicago, IL
60607, (312) 335-4100, fax (312) 335-4400, www.appraisalinstitute.org; but these terms are often used interchangeably by accountants
and others. The appraiser must discriminate between the two terms because used equipment is often the subject of an appraisal or a sales
comparison analysis. Such cases require the appraiser to know if the cost represents a historical or original cost, or both.
12
Webster’s New World College Dictionary, 3rd ed. (New York: MacMillan USA), p. 686.
13
Frederic C. Jelen and James H. Black, Cost and Optimization Engineering (New York: McGraw Hill, Inc., 1991).
14
For example of other components, see Table 14.15 at p. 348 of Jelen and Black, Cost and Optimization Engineering, (New York:
McGraw Hill, Inc., 1991); and Table 2.4 at pp. 18–19 of Humphreys and Katell, Basic Cost Engineering, Marcel Dekker, Inc., September
1995.
15
Jelen and Black, Cost and Optimization Engineering, (New York: McGraw Hill, Inc., 1991).
16
Chilton, C.H., Cost Engineering in the Process Industries (New York: McGraw-Hill, 1960).
91
Cost Approach
17
Humphreys and Katell, Basic Cost Engineering, pp. 12–22, Marcel Dekker, Inc., September 1995.
18
Grant and Norton, Depreciation, p. 268, revised printing, New York: The Ronald Press Company, 1955, LCCN55006997.
19
Ibid, pp. 269–270; see also Bonbright, pp. 185 and 189, The Valuation of Property, Vols. 1, 2 and 4, 1965, Reprint by Michie
Company, Charlottesville, VA, LCCN 37003401. Note that the substitute asset may not be hypothetical and often actually exists and that
advantages being mentioned are forms of “betterment” as discussed earlier.
20
This conclusion assumes that the services of the asset are worth the same in its later period of use as in its early period of use, which
may not be the case due to increases in operating costs or reductions in operating efficiency with age; see the discussion of this point on
pages 235–236 of Engineering Valuation and Depreciation, Anson Marston Robley Winfrey, and Jean C. Hemstead, (Iowa City: Iowa
State University Press, 1953), LCCN 52008322.
21
Anson Marston, Robley Winfrey, and Jean C. Hemstead, Engineering Valuation and Depreciation (Iowa City: Iowa State University
Press, 1953), LCCN52008322.
22
See Example 2.
In this discussion, the term operating expenses is intended to refer to total manufacturing costs, including most elements of “cost of
23
goods sold” as well as “operating expenses.”

24
This discount rate may be a different discount rate than the plant’s or company’s weighted average cost of capital. For example, see
Les Schwab Tire Centers of Oregon v. Crook County Assessor, Oregon Tax Court, where the court ruled that a riskless rate should be
used to discount the future excess operating costs because the riskiness of the excess operating costs was less than the overall cash flows
produced by the business.
25
See note 26.
For a detailed description of the second method, see Robert G. Crawford and Gary C. Cornia, “The Problem of Appraising Specialized
26
Assets,” The Appraisal Journal, Jan. 1994, pp. 75–85.

27
With respect to economic obsolescence on an overall plant basis, if new plants are not being built, it may be because the cost new of
replacement plants is higher than the present value of the cash flows that new plants could produce. Thus, if new plants are not being
built, it may be an indication of significant industry-specific economic obsolescence. In such a situation it may be that use of the cost
approach, at least on an overall plant basis, is not appropriate.
28
Since this example set up functional obsolescence at 0 by default, the remaining obsolescence factor represents economic obsolescence
assuming, of course, that the amount assigned for physical deterioration is 100% correct. However, under most circumstances, there will
also be some physical deterioration and some functional obsolescence that cannot be totally accounted for and, therefore, it would be
erroneous to assign the result of this calculation entirely to economic obsolescence.
29
In most instances when a combination of fixed amounts and percentages are used within a given type of depreciation calculation (e.g.,
physical, functional or economic) that the fixed dollar amounts should be deducted before any percentage adjustments. For example, if
the cost-to-cure an item of physical deterioration is known and the physical deterioration is estimated on a percentage basis, the cost-
to-cure would be deducted first and then the percentage of physical deterioration would be applied to those items that remain and that
would not have been adjusted by the cost-to-cure amount.
92
4
Sales Comparison Approach
Objectives:
1. Describe the sales comparison approach.
2. Discuss elements of comparability.
3. Illustrate the application of the sales comparison approach to individual
assets, production lines, and whole plants.
The MTS appraiser uses the sales comparison approach1 to indicate value by ana-
lyzing recent sales (or offering prices) of properties that are similar (i.e., comparable) to
the subject property. If the comparables are not exactly like the properties being appraised,
the selling prices of the comparables are adjusted to equate them to the characteristics of
the properties being appraised.
The basic procedure in the sales comparison approach is as follows:
1. Gather data on sales and offerings of similar properties
2. Determine their comparability to the subject property
3. Determine the appropriate units of comparison
4. Organize the data into an array (or comparison chart) as appropriate
5. Analyze and adjust the comparable data
6. Apply the results to the subject
Like the cost and income approaches, the sales comparison approach assumes that
the informed purchaser would pay no more for a property than the cost of acquiring a
comparable property with the same utility.
This approach focuses on the actions of actual buyers and sellers. In theory, the
sales comparison approach measures the loss in value from all forms of appraisal deprecia-
tion and obsolescence that are inherent in the individual asset, assuming appropriate adjust-
ments are made to the comparables to reflect differences between them and the subject.2
The used equipment market is an established means of buying and selling equip-
ment. The used market consists of used machinery dealers, auctions, and public and private
sales, and it is often (but not always) the most reliable method of determining certain types
of value for certain types of properties.
93
The sales comparison approach is most reliable when there is an active market
providing a sufficient number of sales of comparable property that can be independently
verified through reliable sources. Examples of properties generally having such markets are
automobiles and trucks, computers, aircraft, standard machine tools, and other properties
with an identifiable market. The important concepts to consider are “active market” and
“verifiable information.” An active market has truly independent transactions occurring
under free market conditions. When researching market sales, the appraiser should verify
that the sales are independent rather than being conducted by more than one seller or buyer,
as the latter situation could create a false appearance of an active market. No set number of
sales makes a market.
The sales comparison approach is not feasible when the subject property is unique,
and it generally will not be feasible if an active market for the property does not exist. An
inactive market, or one where there are a limited number of sales of comparable property,
may indicate a lack of demand or the existence of economic obsolescence. When an inac-
tive market exists, property might be better analyzed using the income or cost approaches.3
This chapter discusses the sales comparison approach as applied to an individual
asset (such as a single item of equipment), a related group of assets (such as a production
line), and an entire industrial facility. The implementation of the sales comparison ap-
proach may differ significantly depending on whether the subject is an individual asset, a
group of assets, or an entire facility. The approach generally becomes more complicated
when applied to a group of assets or an entire facility, because buyers (and by implication
sellers) of these more substantial assets often, either explicitly or implicitly, consider the
present value of the future benefits of ownership (e.g., net cash flow) in making purchasing
decisions. Although this consideration reflects an income approach, this concept also must
be taken into account in the sales comparison approach, since all valuation methods must
attempt to replicate the analysis and behavior of buyers and sellers in the real world.
Premises of Value
The appraiser’s analysis begins, not with the search for comparables, but with the
determination of both the appraisal’s purpose and its appropriate premise of value. It is es-
sential to determine the proper value premise at the beginning of the valuation assignment,
as discussed in Chapter 1. Different premises may require consideration of different facts.
Premises of value embody fundamental concepts and various level-of-trade considerations.
Certain appraisals may require variations of the various premises of value as defined in this
text. For example, leases, contracts, regulations, laws, and court decisions may require cer-
tain variations; or different appraisers or appraisal firms may have a preference for certain
variations. Thus, it may be appropriate to modify definitions to match the purpose or use
of a particular appraisal, but the appraiser should be careful not to alter the fundamental
concepts embodied in these definitions without compelling reason.
Identification of the Subject Property

One of the first steps in the sales comparison approach is the proper identifica-
tion of the subject asset. The microidentification of the subject property is discussed in
detail in Chapter 2. Microidentification includes determining and listing characteristics
94
such as make, model, serial number, size, capacity, year of manufacture, attachments, and
condition.
Comparable Sales and Adjustments

Recent sales of assets identical to the subject often cannot be found. If this is the
case, it is necessary to find sales of assets providing comparable or equivalent utility. It
should be understood that “comparables” will often be just that: comparable but not identi-
cal to the subject.
If the comparable sale is not identical to the subject, the selling price of the com-
parable must be adjusted to indicate what the selling price of the comparable would have
been if the comparable had been identical to the subject. The appraiser should remember
that adjustments are made to the comparables, not to the subject property. Adjustments are
made for differences between the comparable’s and subject’s chronological and effective
age, condition, capacity, location, size, date of sale, circumstances of sale (e.g., level of
trade or “as-is/where-is” condition), environmental compliance, safety compliance, and
other factors that would have affected the comparable’s sale price. These are discussed in
greater detail later in this chapter.
When adjusting a comparable sale, the appraiser is determining how much more or
how much less the comparable would have sold for if it had been identical to the subject
in a given single characteristic, such as effective age. For example, if the comparable’s
effective age was ten years, compared to the subject’s effective age of five years, the ap-
praiser normally would make an upward adjustment to the comparable’s actual selling
price (i.e., increase the comparable’s selling price) to reflect the appraiser’s opinion of what
the comparable’s selling price would have been if its effective age (when it sold) was five
years instead of its actual effective age of ten years. Similar considerations should be made
for other differences between the comparable and the subject.
When appraising under the concept of in continued use or installed, the appraiser
generally adjusts the comparables to include any value that may be associated with direct
and indirect installation costs. The appraiser will need to make further adjustments to the
comparables to reflect a different type of sale. For example, if the comparable is a sale to
a dealer by an end-user (or conversely if from a dealer to an end-user), an adjustment may
need to be made to equate that sale with the appropriate level of trade.
Unlike real estate appraisal, the MTS appraiser generally does not inspect each com-
parable. This would be impractical in most cases because of the large number of individual
assets being appraised and the fact that comparables may come from a large geographical
area. The appraiser often uses databases organized by equipment category and covering
sales in a large geographical area. It is important that this market data come from reliable
sources, which can be verified for accuracy where possible. This does not mean that every
comparable sale must be verified, but it does mean that a professional appraiser should use
databases that are generally reliable and that provide an understanding of the transaction
basis of the comparable sale (e.g., sale to a dealer, from a dealer).
Sales are not the only value indicators an appraiser may use. Current offerings or
listings, if properly adjusted, also may be considered as comparable sales.
95
In and of itself, the number of comparable assets currently available in the used
market may have a bearing on the subject’s value. If many comparables are being offered
for sale, prices may be depressed and there may be little demand for the subject property.
The appraiser should become familiar with the market applicable to the subject
property. This market may be local, regional, national or international. The international
market may require special consideration when older production equipment is sold to users
in developing countries. Equipment that is obsolete or unable to be operated competitively
in the United States may be profitably operated in developing economies where there are
lower labor, raw material, or other costs.
Elements of Comparability
Ideally, when using the sales comparison approach, the MTS appraiser should strive
to base conclusions on sales of identical assets that have been exchanged in the market-
place. Unfortunately, it is rare to find sales of units identical to the subject. In practice, the
market investigation probably will reveal sales of assets that are similar but not identical,
and it is this analysis of similarity upon which the appraiser should base an opinion of
value. Some of the elements of comparability are the following:
Chronological age and effective age
The appraiser should try to determine the chronological age and the effective age
of the comparable at the time it was sold. This usually requires comparing both the age and
reported condition of the comparable and making adjustments to account for upgrades and
rebuilds as necessary.
Condition
Differences in condition affect selling prices of similar assets. This is a difficult area
of comparison, because while the subject’s condition may be known, it is often difficult to
ascertain the condition of the comparable. If possible, there should be an investigation into
the comparable’s condition.
Capacity
Ideally, the comparable should have the same, or very similar, capacity as the sub-
ject. If not, it may be necessary to adjust the comparable’s selling price to account for
capacity differences.
Features (accessories)
The appraiser should strive to compare the subject to comparables with the same
features and accessories.
Location
The geographical location of the comparable sale may affect the selling price. In
addition, the physical location of an asset within a plant also may affect the selling price.
For example, under removal concepts, two identical package boilers, one on the main floor
and one on the third floor, would be expected to have different selling prices (all other
factors being equal) because the one on the third floor will require greater dismantling and
removal costs.
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Manufacturer and quality

The appraiser should try, if possible, to compare the subject to sales of similar as-
sets made by the same manufacturer. If data from the same manufacturer are not available,
the appraiser should compare the subject to units manufactured by a company that market
participants consider comparable to the manufacturer of the subject property. The market-
place may equate certain manufacturers with higher-quality equipment and others with
lesser-quality equipment. In some cases, this may be based on a real quality difference; in
other cases, this may be simply a “perception” in the marketplace. Either way, it may drive
equipment value. If the comparable’s quality is not equivalent to the subject, the appraiser
should either discard the comparable or make the appropriate adjustments.
Motivation of parties
This is an important item of comparison, especially for larger units. Appraisers
should attempt to identify the motivation of the buyer and seller and how this motivation
affects the subject’s value. In most cases the selling price of a comparable will differ, for
various levels of trade, depending on whether it is purchased by a dealer (for resale) or by
an end user (for use in a facility).
Price
In all cases, especially where properties are sold as an entire entity and not piece-
meal, the transaction price should be investigated and expressed on a cash basis. This is
particularly true if favorable financing or a trade-in was involved in the comparable sale
transaction. This commonly is called a cash equivalency adjustment.
Quantity
Unit prices can vary considerably depending on the quantity sold. Adjustments
must be made for bulk or large-quantity sales. Quantity is also related to market conditions:
a buyer’s market may suggest that a larger quantity is available or simply that demand is
not as high, while a seller’s market may suggest a limited quantity available or that current
demands are high.
Time of sale
The appraiser should strive to obtain sales occurring within a reasonable period
of time from the appraisal’s effective date. This is especially important during volatile
markets. In theory, comparable sales should be close to the effective date of the appraisal,
but these are not always possible to obtain. When sales that occur beyond “a reasonable”
period of time need to be considered, the appraiser should explain this and make appropri-
ate adjustments if the data is less than desirable.
Type of sale
The type and terms of sale generally indicate different price levels or levels of
trade. The same asset that is purchased by a machinery dealer at an auction (usually a
liquidation premise) probably will have a higher price when it is sold by the dealer to an
end-user (a market premise). The dealer is purchasing for profitable resale, while the end-
user is purchasing for immediate installation at the facility. The end-user’s other options
are to purchase from the dealer or from another end-user, each of which requires that the
seller be compensated above the level of a liquidation sale as motivation to sell.
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Techniques of Comparison
The following are the three most commonly used techniques for establishing value
of individual items of machinery and equipment using the sales comparison approach:
Direct match
This technique establishes value based on a direct match of the subject to an identi-
cal asset or comparable. A good example is an automobile valued using a published pricing
guide. If the manufacturer, model number, age, mileage, and accessories are known, it is
relatively simple to determine the subject’s value. Adjustments are limited to mileage and,
more important, condition. In this case, the appraiser is directly comparing the subject to
the compilation of sales of other identical autos. The direct match technique provides what
is probably the most accurate indication of value using the sales comparison approach.
Without a direct match, value conclusions become somewhat more subjective.
Comparable match
This technique establishes value based on analysis of similar (but not identical)
assets using some measure of utility (e.g., size, capacity) as the basis of comparison. For
example, when appraising an engine lathe manufactured by Company A, the appraiser
finds no sales of similar engine lathes manufactured by Company A, but does find sales of
similar engine lathes manufactured by Companies B and C. Obviously, this technique is
more subjective than a direct match, requiring additional adjustments based on an analysis
of the elements of comparability previously discussed. For example, the appraiser would
have to judge whether the typical market participant would consider engine lathes manu-
factured by Companies A, B, and C to be approximately equal in value. If not, adjustments
would have to be made to the comparable to bring them in line with the subject.
Percent of cost
This technique establishes a ratio between the selling price and the current cost new
of a property at the time of sale. With sufficient data, similar properties can be analyzed and
relationships developed among age, selling price, and cost. For example, an appraiser is
valuing a 16” × 208” engine lathe manufactured by Company A. The market investigation
does not find a direct match. It does identify several similar lathes manufactured by several
companies (including some by Company A), but the sizes of these lathes are either much
smaller or much larger than the subject lathe. Assuming the analysis suggests that selling
prices of engine lathes with an age and condition similar to the subject are in the range
of 40–50% of current cost new, it would be logical to conclude that the subject’s value
falls somewhere between 40% and 50% of its current cost new. It should be noted that
the market for a unit may vary according to the unit’s size. For example, small lathes may
appeal only to maintenance shops, medium-size lathes may appeal to standard machine
shops, while very large lathes may be used only in oilfield, shipyard repair, or railroad
applications. Appraisers should ensure that their data set fits their subject.
Appraising an Individual Unit
The following example applies the sales comparison approach to an individual
unit, such as a single piece of equipment. Sources of market data used for appraising a
single piece of equipment include used equipment dealers or other sellers, used equipment
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buyers, equipment databases, auction sales databases, Internet databases, client-fixed asset
ledgers, trade publication classifieds, and leasing companies.
Again, adequate identification of the subject is necessary before implementing the
sales comparison approach. A sample description for a hypothetical single piece of equip-
ment is shown below.
Type of Equipment: Crawler loader

Manufacturer: XYZ Industries
Model: CT4
Serial Number: CT478
Year Manufactured: 2006
Observed Condition: Very good
Description: Low ground pressure model with a six-
way blade, rollover protection system,
diesel engine, very good undercarriage
Location: Houston, Texas
Effective Date of Appraisal: Current Date
This description is an example of one way to list a piece of equipment. There are
other acceptable formats. Some may include certain attachments or appurtenances. Once
the subject is described, the process of identifying market sales begins.
Liquidation Value—Individual Unit
If the premise of value is liquidation value (orderly or forced) for the crawler loader
described above, the first step would be to search a number of data sources for comparable
sales at a liquidation level of trade. Data sources might include publications such as The
Book, Equipment World, and Top Bid, covering transactions relating to construction equip-
ment, trucks, and trailers. Other possible sources include used equipment dealers and other
publications, some of which are listed in Appendix G. It also may be helpful to contact
other appraisers and dealers who maintain individual databases.
After accurately describing the property and conducting a search for market sales,
suppose eight auction sales are found as potential comparables. These are shown in the
following list for illustration purposes.
1. Description: XYZ Industries M/N CT4 S/N 430

(Very Good Condition)
Low Ground Pressure Model, Six-Way
blade, Rollover Protection Structure, Very
Good Undercarriage
Transaction: Auctioneers, Inc.
April 2010, Gadsden, AL
$54,000 Sale Price
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(Very Good Condition)
Blade, Drawbar, Engine
Enclosed, Open Rollover Protection
Structure, Single Bar Grousers,
30” Pyramid Pads, Very Good Undercarriage
Transaction: Local Auctioneers
January 2010, Fort Worth, TX
$50,000 Sale Price
(Good Condition)
Blade, Drawbar, Engine
Enclosed, Open Rollover Protection
Structure, Single Bar Grousers,
30” Pyramid Pads, Good Undercarriage
Transaction: South-Atlantic Auctions

January 2010, Houston, TX
$45,000 Sale Price
(Good Condition)
Blade, Rollover Protection
Structure, Diesel Engine, 30” Shoes,
Good Undercarriage
Transaction: Sun Auction Co.

February 2010, Kissimmee, FL
$55,000 Sale Price
(Condition Unknown)
Engine Enclosed, Canopy with Sweeps
and Rear Screen
Transaction: Complete Auctioneers
March 2010, Nashville, TN
$48,000 Sale Price
(Good Condition)
Blade, Canopy, 36” Single
Bar Grousers, Pads, Fair Undercarriage
100
Transaction: Family Auctioneers, Inc.

June 2010, Surrey, BC, Canada
$42,000 Sale Price (US$)
(Good Condition)
Blade, Hydraulic Controls,
Engine Enclosed, Rollover Protection
Structure, 30” Pads,
Good Undercarriage
February 2010, Fort Worth, TX
$51,000 Sale Price
(Good Condition)
Blade, Engine Enclosed,
Rollover Protection Structure, Canopy with
Sweeps, Good Undercarriage
April 2010, Gadsden, AL
$52,000 Sale Price
The eight sales are summarized in Table 4.1.
Price Date of Sale Condition Sale Location

Sale 1 $54,000 4/10 VG AL
Sale 2 $50,000 1/10 VG TX
Sale 3 $45,000 1/10 G TX
Sale 4 $55,000 2/10 G FL
Sale 5 $48,000 3/10 UNK TN
Sale 6 $42,000 6/10 G CAN
Sale 7 $51,000 2/10 G TX
Sale 8 $52,000 4/10 G AL
Table 4.1. Comparable Sales Summary.
The following is an example of the analysis of various comparable sales data for the
purpose of determining an indication of liquidation value.
After analyzing the eight comparable sales and checking serial number guides, it is
determined that the properties from Sales 1 through 4 were manufactured in 2006, the same
year as the subject, while the properties from the remaining four sales (5 through 8) were a
year older, or 2005 models. Prices range from $42,000 to $52,000 for the 2005 models and
$45,000 to $55,000 for the 2006 models.
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The next step in the valuation process is to compare these sales to the subject prop-
erty. For the crawler loaders manufactured in 2006, the first adjustment is made for condi-
tion. The subject’s condition is “very good.” A review of the sales shows that Sales 1 and
2 were in “very good” condition, while Sales 3 and 4 were in only “good” condition. Thus,
the appraiser needs to consider how much higher the prices in Sales 3 and 4 might have
been if the items’ condition had been equal to the subject’s. Under the circumstances, an
upward adjustment to Sales 3 and 4 is probably warranted. But by how much? Quantifying
adjustments is one of the most difficult aspects of sales comparison approach appraisals.
The best technique, if the data is available, is the paired sales technique. The appraiser
notes that Sales 2 and 3 are identical in every relevant respect except for condition and
selling price. Sale 3’s condition was good and it sold for $45,000; Sale 2’s condition was
very good and it sold for $50,000. Sales 2 and 3 are paired sales, and it would be logical to
conclude, in the example given, that Sale 3 would have sold for $5,000 more if its condition
had been very good, like the subject’s. Even though Sale 4 is not identical to Sales 2 or 3, it
would be appropriate, in the example given, to adjust its selling price upward by $5,000 to
equate its condition with that of the subject. Most machinery and equipment appraisals will
have too short a time frame to perform this analysis on every single asset being appraised.
It also is necessary to investigate the prevailing market conditions when these
crawler loaders were sold. Note that the subject is located in Texas. Assuming (for purposes
of illustration) (1) a lack of construction activity in Texas in 2010 limited the demand for
crawler loaders; (2) this situation continues to exist in Texas as of the effective date of the
appraisal; and (3) construction activity was surging in Florida in 2010 when Sale 4 was
consummated, suggesting that the price in Sale 4 should be adjusted downward to equate
the market conditions at the time of this sale with those prevailing at the time of the sub-
ject’s. Determining the extent of the adjustment will be more subjective than determining
the adjustment for condition, because in this case the data does not provide the appraiser
with a paired sale (and in the real world this often will be the case). The point here is that
the appraiser has investigated the market conditions pertaining to the various sales and
realizes that a downward adjustment to Sale 4 is needed. The amount of adjustment often
will not be precisely quantifiable, but at least the appraiser has done his or her job by
investigating those conditions of the market sales that are relevant for valuation purposes.
The appraiser should, whenever possible, contact the liquidator to determine the
conditions surrounding an auction sale. The appraiser should ask questions regarding the
number of people in attendance, the number of active bidders, the weather conditions, the
type of advertising, and the number of brochures mailed out. For example, the appraiser
would want to know if there were seven people at the auction but only one active bidder,
which may have depressed the selling prices. Although it may be difficult to gather this
type of information, its absence can impair the reliability of the appraisal conclusions.
This discussion is not intended to illustrate all the adjustments that would be made
to arrive at a value conclusion for the subject crawler loader. Rather, it is intended to
emphasize that the appraiser’s job is to investigate and develop those facts about the market
sales and the subject property that are relevant for valuation purposes. Adjustments differ
from property to property and from project to project. There are no rules of thumb or
specific guidelines that apply in every case. In fact, it is inadvisable to apply the same
adjustments to every appraisal assignment. The appraiser cannot simply rely on databases
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and use information without considering whether adjustments need to be made. The ap-
praiser is primarily an investigator and developer of facts—not all possible facts, but those
facts that affect value.
Fair Market Value in Continued Use4 or Installed—Individual Unit
Consider a situation in which the buyer of a property in liquidation intends to use
that asset in an industrial operation (a continued use or an installed premise). Assume the
buyer purchased for cash on an “as-is, where-is” basis. In this case, the buyer must pay
the cost of dismantling and removing the asset, as well as any maintenance or rebuilding
costs. If the asset were purchased from a dealer, these costs would normally be “buried,”
or incorporated, in the dealer’s selling price. In theory, the sum of the purchase price plus
dismantling, removal, rebuilding, and maintenance costs should be the same for a dealer as
for an end-user, except for the dealer’s overhead and profit (excluding any differences that
may exist for relocation costs).
The analysis for fair market value in continued use (with assumed earnings or with
an earnings analysis) or fair market value – installed is the same until the profitability of
the property is analyzed or assumed. The following examples address the analysis for an in
use or installed premise prior to analyzing the profitability.
Example 1: Using the sales comparison approach to estimate fair market

value in continued use or fair market value–installed.
Your task is to estimate the fair market value in continued use or fair
market value–installed of an eight-year-old milling machine, using the sales
comparison approach. The machine currently is being used for custom work,
is used frequently, and is well maintained. Observation and discussion with
plant personnel confirm that the machine is in good condition.
You attend auctions regularly and have noticed that this particular machine
is very popular. Data suggest the machine sells at auction prices ranging
from $1,000 to $7,500, depending on age and condition. Recent sales data
suggest that, given the subject’s age and condition, it would sell for between
$5,500 and $6,500. Discussions with used machinery dealers indicate they
would ask $6,500 for this asset and would expect to sell it for $6,000. Based
on your knowledge of the market and the confirming discussions with
dealers, it is logical to conclude that $6,000 would represent the value of
the milling machine itself, excluding any indirect cost considerations.
The next step is to add the value, if any, attributable to, or value contribution,
if any, of the installation and other costs that convert this base unit value
amount to a fair market value–installed or fair market value in continued
use basis. This asset is relatively simple to install and connect. Because it
is a common item, assume that the asset would be purchased locally with
a freight cost of $200. The time for two millwrights to unload and set the
machine in place is two hours at a cost of $125. Electrical installation,
including controls, is $300. Therefore, the total cost new of the installation
and other assemblage costs is the sum of all of these, or $625.
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Since the asset was installed new eight years ago, therefore all these installed
or in-use elements that exist in conjunction with the subject installed milling
machine are also eight years old on the effective date of the appraisal and
should be depreciated, because they are not new and do not have the same
remaining useful life as if they were new. Based on an age of eight years and
an expected life of 20 years, depreciation is estimated on an age/life basis to
be 40% (8 ÷ 20 × 100 = 40%). Applying 40% to the cost new of $625 results
in a value of $375 for the costs of freight, installation, and connections. The
sum of the base unit ($6,000) plus the value of the freight, installation, and
other costs ($375) equals the indicated fair market value in continued use or
fair market value – installed, that is, $6,375.
The fair market value in continued use may require adding state sales tax
to the value, whereas the fair market value–installed does not usually apply
that tax, since the fair market value–installed may be for assets and tax may
be required upon that value. Some states have sales tax on certain assets but
not on others, and it is up to the appraiser to be aware of the appropriate
statute when assigning value.
This example has been simplified to illustrate the concept behind the sales com-
parison approach. The numbers used above are fictitious, but such a wide range in selling
prices can be realistic. To conclude a specific number from that broad a range (as described
in the example) requires supporting data and a strong knowledge of the marketplace. The
more supportable the data gathered, the more accurate the end results will be.
Appraising a Related Group of Assets

There are many reasons for appraising a group of assets such as a production line: to
determine fair market value under various premises at the end of a lease, for acquisition or
sale, or for insurance purposes. Although many of the methods just discussed (concerning
the appraisal of a single unit) are applicable to the appraisal of a group of assets, appraising
these assets introduces complexities not encountered when appraising a single asset. This
is especially true when using the sales comparison approach to appraise a group of assets
under the premise of fair market value–installed or fair market value in continued use.
The appraiser will need to be familiar with the subject property’s industry. Informa-
tion that will assist in the valuation process can be obtained from trade publications, library
research, and interviews with the client and used equipment dealers. The research for fair
market value in continued use should include the industry’s past, current, and projected
economic conditions: the research for fair market value - installed may or may not include
any or all of these conditions depending on the use of the asset in specific industries.
In the following examples, it is assumed that the client has requested value es-
timates for a production line under several different market value and liquidation value
premises of value. Each value concept will be discussed as it applies to the valuation of
a production line or other group of related assets. To illustrate the appraisal methods, the
following complete plastic vacuum molding production line will be used as an example:
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ABC Model XXX Molding Line Manufactured New in 1985.

Size: 100’ Long x Three Mole Wide Index
Overall Condition at Time of Inspection: Good
Location: Pennsylvania
Effective Date of Appraisal: September 2007
Table 4.2. Plastic Vacuum Molding Production Line.
Fair Market Value—Production Line

Assume that the appraiser’s research has revealed market sales to end-users by
reputable used equipment dealers specializing in plastics industry equipment.5 During the
verification process, calls to the used equipment dealers indicate the information already
obtained by the appraiser was accurate in all material respects. For purposes of the follow-
ing examples, assume the appraiser has analyzed the market sales, compared the market
sales to the subject, made appropriate adjustments to the comparables (as discussed earlier
in this chapter), and concluded that the subject’s fair market value is $200,000.
Fair Market Value in Continued Use—Production Line

Most valuation of Fair Market Value in Continued Use as a concept is accomplished
by the cost approach in which the economic obsolescence is derived from the industry
and not from item-specific sales. If the industry as a whole has an economic penalty, it is
often that factor or penalty that is used for the depreciation for that factor. If there is no
industry-wide penalty, there may be an item-specific economic penalty, or there may be
no economic obsolescence. Economic obsolescence is easier to define and apply in the
cost approach using the three factors, whether independently or accrued, for purposes of
depreciation adjustment. It is much harder to determine in the market approach, since sales
in that market may have an industry-wide or item-specific obsolescence factor built into the
other sales which would have to be removed. However, it may be possible that a case could
be made for that method as determining that additional value, if any, for an in continued
use over and above an installed value.
In determining the fair market value in continued use by the sales comparison ap-
proach of an assemblage of assets such as a production line, two additional steps are taken
to those previously described. First, the appraiser needs to add the value contribution of the
installation and other costs required to get the base unit up and running and contributing to
the overall operation of the production line or facility. Second, the appraiser must address
whether there are sufficient business earnings to support the value indication obtained by
adding the value of the installation and other costs to the used market value of the base unit
at the appropriate level of trade. At that point it is still necessary to adjust for the differ-
ence, if any, of the industry penalty vs. the item specific economic factor if one is to truly
accomplish an in continued use value as opposed to the installed concept.
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Adding the value contribution of assemblage costs (when applied

only to an in continued use concept)
Appraising assets under the premise of continued use requires adding the value
contribution of the costs required to get the base units installed in the plant and ready to op-
erate. In effect, the appraiser converts the market price of the base unit into the fair market
value in continued use. In this chapter, the various costs that accomplish this conversion
will be referred to as “assemblage costs.”
Thus, to determine fair market value in continued use, the appraiser replicates the
actions of a buyer who desires to assemble an operating package of assets from the used
equipment market (at an end-user to end-user or used-equipment-dealer to end-user level
of trade). The appraiser, in effect, purchases base units (i.e., individual assets) in the used
market, and then adds the value of those assemblage costs required to make the base unit
an operable unit contributing (or capable of contributing) to the overall operation of the
facility or production line. Typical assemblage costs include sales tax (if applicable); costs
of dismantling, moving, and setting in place; freight costs necessary to get the assets to the
plant site; rebuilding or retrofitting costs; installation costs, including connections, founda-
tions, and millwright work; connection costs, including piping, wiring, and instrumenta-
tion; design, engineering, or evaluation costs (if necessary); start-up and testing costs; and
any other direct or indirect costs that are normally required to place the asset in service.
These are the same direct and indirect costs discussed in the cost approach.6
Whether and when assemblage costs (i.e. freight, taxes, installation, and
other such costs) should or should not be depreciated continues to be a
matter of debate even amongst members of the MTS Committee of the
American Society of Appraisers. As of the date of publication of this text,
most appraisers take the position that appraisals for fair market value in
continued use, assemblage costs should be depreciated, and that is the
position consistently adopted in this text. Most appraisers agree that when
an owner sells assets on an in continued-use basis, or when a potential buyer
of those assets purchases on that basis, the transaction entails used assets
and used assemblage costs and therefore the assemblage costs should be
depreciated along with the asset itself. However, there may be occasions
when it is appropriate not to depreciate assemblage costs. This position
arises most often regarding insurance appraisals, especially where an actual
loss has occurred, but differing opinions do arise regarding appraisals for
other purposes. Ultimately it is up to the appraiser to weigh all of the factors
surrounding the purpose and intended use of any appraisal, including the
intent and terms of any insurance policy, to determine how to proceed.
Up to this point, depreciation of the assemblage costs has not been considered.
Under most in continued use appraisal premises, assemblage costs should be depreciated.7
Suppose that ten years ago a new asset was purchased and installed, and now that asset is
being appraised. Because the asset has been operating for ten years, both the base unit and
the assemblage costs (e.g., freight, installation, connections) are not new and both have
106
shorter remaining useful lives than they did when new. Assuming that the depreciation
affecting the value of the base unit already has been measured by the used equipment
market,8 the appraiser still needs to calculate the loss in value of the assemblage costs by
depreciating the replacement cost new of the assemblage costs, using the same techniques
described in the cost approach. Once these assemblage costs are accounted for, the used
machine is installed and ready to operate. The sum of the base unit and depreciated indirect
assemblage costs represents the market price for the machine plus the current cost new
(depreciated) to make the machine operable.
To illustrate one method of depreciating assemblage costs, assume that the replace-
ment cost new installed of the previously discussed vacuum molding line is $500,000, and
the following additional information is provided for the complete 1985 ABC Model X
vacuum molding line example:
Fair Market Value as Determined Earlier: $200,000

Replacement Cost New: $500,000
Therefore the Indicated Depreciation from All Causes Can be Calculated as
1-($200,000/$500,000) or: 60%
Table 4.3. 1985 ABC Model X Vacuum Molding Line Example.
Note: Figures are for illustration only and are not intended to suggest actual market values
of this type of equipment.
The appraisal depreciation that is inherent in the equipment itself, 60%, already
is reflected in the $200,000 fair market value of the uninstalled production line that was
obtained from the used equipment market.9 Adding the depreciated value of assemblage
costs will provide an indication of fair market value in continued use. The best place to
obtain installation and other assemblage cost information is from the engineering depart-
ment of the company owning the asset in question. If it is not available from that source,
the appraiser should estimate these costs.
Thus, to determine fair market value in continued use, the appraiser replicates the
actions of a buyer who desires to assemble an operating package of assets from the used
equipment market (at an end-user to end-user or used-equipment-dealer to end-user level
of trade). The appraiser, in effect, purchases base units (i.e., individual assets) in the used
market, and then adds the value contribution of those assemblage costs required to make
the base unit an operable unit contributing (or capable of contributing) to the overall opera-
tion of the facility or production line. Typical assemblage costs include sales tax (if ap-
plicable); costs of dismantling, moving, and setting in place; freight costs necessary to get
the assets to the owner’s site; rebuilding or retrofitting costs; installation costs, including
connections, foundations, and millwright work; connection costs, including piping, wiring,
and instrumentation; design, engineering, or evaluation costs (if necessary); start-up and
testing costs; and any other direct or indirect costs that are normally required to place the
asset in service. These are the same direct and indirect costs discussed in the cost approach.
It should be pointed out that taxes are typically not added on the in place concept as it is
the value of assets in the market place in which taxes would be paid to own rather than a
corporate purchase in which taxes are already paid and therefore are acceptable to be a part
of an in continued use value.
107
This step quantifies the contribution to value of the assemblage costs and adds these
to the value previously determined for the production line:
Fair Market Value of Production Line: $200,000

Replacement Cost New of Assemblage Costs: $100,000
Minus Depreciation of Assemblage Costs @ 60%: −$60,000 −$60,000
Thus the Value Contribution of the Installation is: + $40,000
Preliminary Indication of Fair Market Value In Continued Use: $240,000
Table 4.4. Contribution of Assemblage.
Previously it was stated that in determining fair market value in continued use,
two additional steps are added to the steps taken to measure fair market value: the ap-
praiser must first add the depreciated value of the assemblage costs; and second, determine
whether there are sufficient business earnings to support the value conclusion as to the
underlying assets. It should be noted that although our discussion of business earnings
has been postponed until now to facilitate the presentation of sales comparison approach
techniques, in practice it may be that the business earnings have been analyzed before, or
concurrently with, the machinery and equipment valuation process.
Are there sufficient business earnings to support the “in continued

use” value conclusion?
The definition of fair market value in continued use includes an assumption that
there are sufficient business earnings to support the value conclusion as to the assets in
question. The appraiser has two options for dealing with this issue. The first option is to as-
sume that there are sufficient earnings (Fair Market Value in Continued Use with Assumed
Earnings). The second option is to use income approach methods to actually determine
whether there are sufficient earnings (Fair Market Value in Continued Use with an Earn-
ings Analysis). If the first option is selected, the appraiser must ensure that the appraisal
report clearly states that the value reported for the assets in question assumes that business
earnings are sufficient to support the value conclusion; otherwise the appraisal report may
be misleading.10
There may be times, however, when the appraisal’s purpose, use, or other require-
ments preclude the appraiser from assuming that earnings are sufficient to support the
value conclusion. In such cases, the appraiser needs to actually determine whether the
business earnings are sufficient to support the value conclusion. The appraiser can conduct
the analysis personally, or if not qualified, involve another, qualified, appraiser.
Using the previous example, suppose that the option of merely assuming suffi-
cient earnings is not available to the appraiser. Recall that we had just concluded that the
preliminary indication11 of fair market value in continued use (with assumed earnings) is
$240,000. Suppose that further investigation reveals that the vacuum molding line is one of
the plant’s five production lines, the total facility generates $300,000 of net cash flow annu-
ally, the subject line contributes approximately 20% of the total net cash flow, the subject
production line is expected to generate this cash flow for ten more years, and the discount
108
rate is 12%. Because the present value of $60,000 ($300,000 × 20%) per year for ten years
is greater than $240,000,12 the appraiser can conclude that there is in fact sufficient cash
flow to support the preliminary indication of $240,000 as the correct fair market value in
continued use with an earnings analysis.
On the other hand, if the subject line is generating net cash flow of only $30,000 per
year, the present value of the cash flow stream generated by the line would be substantially
less than the $240,000 preliminary indication of value.13 This result would suggest the
possibility that the subject’s value has been further reduced, from what it would otherwise
be, by plant-specific obsolescence that the used equipment market is not capable of mea-
suring. Plant-specific obsolescence refers to a condition within the particular plant that
reduces the utility or profitability of the subject property. At this point, appraisers should
ask themselves what kinds of obsolescence, especially economic obsolescence, is the used
equipment market not capable of measuring.
An example of plant-specific obsolescence not measurable by the used equipment
market would be a production bottleneck caused by the slower capacity of equipment in-
stalled ahead of the subject in the production process. Assume that the subject production
line has a capacity of 1,000 units per hour but that slower capacity equipment installed
ahead of the subject limits it to actual production of only 800 units per hour; that there is
sufficient economic demand for the extra 200 units; that except for the slower capacity
equipment that is creating the bottleneck, there is no reason why the subject line could not
produce 1,000 units per hour; and that the company owning the facility plans to expend
the capital required to remove the production bottleneck (in appraisal language, to cure
the obsolescence), but that due to constraints on the company’s capital spending, it will
be three years from the effective date of the appraisal before the company can cure the
obsolescence.
In this instance, the appraiser has several alternatives for determining whether the
subject’s fair market value in continued use is affected by obsolescence not measured by
the used equipment market. If there are market sales of 800-unit-perhour vacuum molding
lines, those could be used as comparables instead of market sales of 1,000-unit-per-hour
lines. There are two possible problems with this analysis: first, the bottleneck is scheduled
to be removed in three years; and second, suppose (as often is the case) that there are no
sales of 800-unit-per-hour lines available to be used as comparables (perhaps because,
for example, the next lower-capacity model available for sale has a 500-unit-per-hour
capacity).
A second possible way to analyze the situation would be to focus on quantifying
the reduction in utility (and thus value) caused by the line operating at only 80% of its
rated capacity (the reader is referred to the discussion of this subject in the cost approach
chapter). A possible problem with this analysis in the given case is that this inutility is not
permanent.
A third possible way of analyzing the situation would be to determine the present
value of the lost cash flow caused by the bottleneck during the next three years.14 The kind
of information necessary to make this calculation often is available, if the appraiser is
able to identify the condition in the first place. For example, usually the management of a
process plant is able to provide the appraiser with the kind of data that enable the appraiser
to estimate the present value of lost cash flow caused by a condition such as the above.
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The essential point here is that when appraising fair market value in continued
use, the appraiser should remember that the used equipment market may not automati-
cally measure all depreciation and obsolescence, especially as it pertains to certain forms
of economic obsolescence that may be apparent in the subject company but which may
not be evident in any other property. Appraisers always should ask themselves whether
there may be additional depreciation or obsolescence that the used equipment market does
not reflect. The appraiser may not become aware of the possible existence of unmeasured
obsolescence unless the preliminary value indication of the sales comparison approach is
independently checked against income- or cost-based analyses.
Fair Market Value–Installed—Production Line
It can be seen from the above discussion that it is difficult for an MTS appraiser to
find the adjustment to the costs (value) to reflect fair market value in continued use versus
fair market value–installed. However, there are differences as taught in both the basic
advanced courses of the ASA. Except for sale/leaseback, other lease types, and a few other
purposes, the appraiser rarely will be called upon to perform a fair market value–installed
appraisal of only one production line in a facility containing multiple lines. If the facility
were sold, it probably would be sold as an overall facility, and it would be necessary to
value all of the lines. However, if only one line needs to be valued, such as in an appraisal
in connection with a sale and leaseback, it should generally consider the same factors
as a fair market value in continued use appraisal, except that it would not be necessary
to assume (or independently determine) that there are sufficient earnings to support the
underlying asset value conclusion. Other things to consider would be the segregation of
utilities, workforce, and other considerations that generally could point to a lower value
than fair market value in continued use.
Fair Market Value-Removed—Production Line15
This valuation concept is similar to the fair market value–installed or fair market
value in continued use concept, except that the cost of removal must be considered. Re-
call that the market comparables (in an earlier example) indicated a fair market value of
$200,000 for the subject vacuum line. The removed concept applies to a property within a
dealer’s warehouse, a property ready to ship or currently installed. Under certain circum-
stances, if the cost of removing or reinstalling is significant, an adjustment may be required
for the additional removal expense. Many times this is the case with production lines. A
potential buyer would pay no more than $200,000 for the equipment if it were ready to be
picked up and delivered to the buyer. The appraiser must be aware, however, that buyers
of installed equipment under liquidation or market value conditions often make conscious
(and sometimes unconscious) adjustments to the price offered to cover any removal or
relocation costs.16 The appraiser needs to determine if this is the case with the subject
production line.
Orderly Liquidation Value—Production Line
Orderly liquidation value is typically lower than fair market value, due to the com-
pulsion to sell inherent in the definition. It is, however, possible for the value to be very
close to fair market value, with the difference being that under the premise of orderly liq-
uidation there is a limited period in which to sell. The seller is compelled to sell, although
110
without the same sense of immediacy or urgency that is assumed in a forced liquidation
sale (see the following forced liquidation value discussion). The orderly liquidation sale
may be necessitated by a bankruptcy court ruling, a leasing company, a bank, or another
institution holding a note. The company may need to sell assets for some other reason.
Regardless of the reason for the sale, the compulsion factor must be present. Additionally,
there is generally an assumption that all assets will be sold, though over a longer period
than in a forced liquidation in order to obtain greater net results.
Forced Liquidation Value—Production Line
Under the forced liquidation value premise, a sense of immediacy or urgency af-
fects the period of time and circumstances of the sale. In forced liquidation, the means of
sale are a properly advertised auction or other public sale. It is important to note that in
some instances, auction sales may result in prices equal to fair market value because of the
desirability of the equipment, proper advertisement, and/or high attendance at the auction.
At other times, auction sales can result in prices substantially below the assets’ fair market
value. It is incorrect to automatically assume that the results of an auction always produce
a forced liquidation value. An independent study of the circumstances of each auction sale
should be conducted. An auction is a method of sale, not a value premise. The auction at-
tendees have a wide range of motivations that are reflected in their bid, which may or may
not mirror the premise of forced liquidation value.
Liquidation Value in Place—Production Line
Under the liquidation value in place premise, because of the limited time to com-
plete the sale, the value for the subject production line usually would decrease consider-
ably. The dilemma the appraiser faces is how to quantify the amount of this decrease.
When analyzing the market data gathered, the appraiser always should ask how long the
similar items (about which market data has been collected) were exposed to the market and
whether there was an excess of this type of asset on the used equipment market at the time
of the sale. One option for measuring this is to look at sales in which a line of similar com-
plexity has sold, and compare those to what they might be worth under anther premise such
as cost or fair market, thereby determining what difference may be applied to the subject.
Appraising an Industrial Facility
Applying the sales comparison approach to an entire industrial facility introduces
complexities not encountered when appraising a single asset. This is especially true when
using the approach to appraise an operating facility under the premise of fair market value
in continued use or fair market value–installed (capable of being used).
The appraiser using the sales comparison approach to determine the fair market
value–installed or fair market value in continued use of an entire industrial facility has, in
theory, two alternative methodologies. The first alternative is to use the methods already
discussed to, in effect, replicate the process of a plant owner assembling an operating pack-
age of assets from the used equipment market—that is, purchase individual assets in the
used market (possibly considering the need to dismantle the assets if installed); and add the
value of the various assemblage costs, such as sales tax (if applicable), freight, installation,
connection, and other costs, including any adjustments for level of trade.
111
The second alternative is to compare the subject property (an entire industrial facil-
ity) to sales of comparable industrial facilities. In the following discussion, these sales
will be referred to as “whole plant sales,” and the method will be referred to as “the whole
plant sales comparison approach.” Several of the ASA’s machinery and technical special-
ties courses include exercises using the whole plant approach to value using all of the three
approaches to value.
Limitations of the Whole Plant Approach
Before discussing the whole plant sales comparison approach, it is important to
note that this approach often will not be feasible. Most industrial facilities infrequently
change ownership. Their unique characteristics make comparability difficult to evaluate
and adjustments difficult to quantify without undue speculation. Most industrial facilities
change ownership based on the parties’ perceptions of the present value of the future cash
flow that the facility is capable of generating. Differences in perceived profitability are
crucial and often explain the large difference in the selling prices of ostensibly comparable
facilities. The details of industrial facility transactions are usually confidential. Often even
the selling price, let alone other vital details such as future cash flow projections, is difficult
or impossible to obtain.
In addition to the above problems, the reported selling price of an industrial facility
often includes the value of working capital, other business enterprise intangibles, or other
assets (such as land) that are not included in the subject property the MTS appraiser needs
to value. The value of these assets often is difficult to segregate from the total selling price.
For example, the total selling price of a paper mill may include the value of large timber
reserves, in addition to working capital and other business enterprise intangibles.
Notwithstanding the above, there are situations in which these difficulties do not
exist or can be overcome, and in those cases the whole plant sales comparison approach
may be useful. The approach is best used when the comparables are virtually identical
to the subject and have been sold relatively recently and in an active market. Obviously,
the use of this approach requires extensive research and analysis of comparability, adjust-
ments, and other issues. To employ this approach, the MTS appraiser may need to have
an adequate understanding of business or real property valuation, or to work closely with
appraisers from those disciplines.
Methodology
The whole plant sales comparison approach compares the subject property to whole
plant sales of comparable industrial facilities. It is based on the observation of actual mar-
ket sales involving comparable facilities. The market sales that are initially identified as
possible comparables should be analyzed carefully to ensure that their profitability and risk
characteristics are sufficiently similar to those of the subject facility. While the sold facili-
ties may differ from the subject facility, the effect of these differences should be minimized
by initially selecting transactions that possess characteristics as similar as possible to the
subject facility.
After gathering market sales data, the appraiser makes adjustments to the compa-
rables to reflect differences between them and the subject with respect to numerous factors,
including such things as current and future profitability, future growth, product, future mar-
ket for the product, transaction terms and date, market conditions, physical characteristics
112
such as facility size and capacity, physical condition, deferred maintenance, raw material
costs, labor costs, impact of labor unions, facility location, and distance from market for
finished goods, and numerous other factors that affect value.
After the selling prices of the comparables have been adjusted to equate them with
the subject, the adjusted selling prices are then converted to a common unit of measure,
such as price per unit of output capacity. An indication of the subject facility’s value can
then be developed by multiplying its productive capacity by the price per unit of output
derived from the comparable facility transactions.
Example 2: Whole plant sales comparison approach.
You have been asked to determine the fair market value in continued use or fair
market value–installed of a 500-megawatt (mw) coal-fired electric generating
facility.17 You have performed an income approach (or had another appraiser do
it), and are now considering whether a whole plant sales comparison approach
is feasible. Industry research and discussions with knowledgeable persons have
disclosed a significant number of relatively recent sales (say, within the past two
years) of coal-fired electric generating facilities. You are aware that the whole plant
sales comparison approach is best applied when the comparables are virtually
identical to, or at least extremely similar to, the subject property. Potential sources
of information regarding electric generating facility transactions include United
States Securities and Exchange Commission (SEC) filings, corporate annual
reports, industry trade publications, and news articles.
After much research, you have concluded that only six of the relatively recent
market sales meet the threshold requirements for comparability. Some of the sales
have involved facilities using other sources than coal—gas, oil, or hydroelectric—
to produce power. You have rejected other sales because of significant differences
between them and the subject with respect to future cash flow potential, growth in
cash flow, and capacity. You are now satisfied that the six sales that have survived
the “comparable qualification” process are extremely similar to the subject
property; that is, they are truly comparable to the subject. These six sales are listed
in Table 4.5 for illustration purposes only.
Purchaser Selling Price Capacity (kW) $/kW

Sale 1 $425,000,000 550,000 $773
Sale 2 $350,000,000 425,000 $824
Sale 3 $400,000,000 525,000 $762
Sale 4 $365,000,000 450,000 $811
Sale 5 $400,000,000 500,000 $800
Sale 6 $310,000,000 400,000 $775
Subject To Be Determined 500,000 To Be Determined
Table 4.5. Comparable Sales of Electric Generating Facilities.
Analysis of these transactions indicates the selling price per kW ranges from $762
to $824 and has a mean of approximately $791. Because you eliminated all market
sales except those that were virtually identical to the subject in all important
respects relating to value, you conclude that no adjustments to the
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comparables are needed. The indicated range of values for the subject is $380
million to $412 million ($762/kW × 500,000 kW = $381 million and $824/kW ×
500,000 kW = $412 million), with a mean of $395,500 ($791/kw × 500,000 kW).
The best use of the whole plant sales comparison approach may be to indicate a
reasonable range of value rather than a specific point value estimate, in which case
the appraiser could stop here. If a point value estimate is required, assume that
Sale 5 is virtually a direct match to the subject, in which case the appraiser might
give it extra weight and conclude that the subject’s fair market value in continued
use (or fair market value–installed) is $800 per kilowatt, or $400 million ($800/
kW × 500,000 kW = $400 million). Once the $400 million conclusion of value is
reached by the sales comparison approach, it should be compared to the results
indicated by the income approach (which we have assumed was also done). If
the results of the sales comparison approach are substantially higher than those
of the income approach, the appraiser should check for additional plant-specific
functional or economic obsolescence that has not been measured by the sales
comparison approach.
Example 3: Whole plant sales comparison approach using percentage of

cost technique.
Your task is to estimate the fair market value in continued use or fair market
value–installed of a coal preparation plant. The subject is ten years old and rated
at 800 tons per day. The facility receives maintenance on a preventive basis and
the plant is in reasonably good condition. Investigation reveals a recent upturn
in the coal mining industry, and because of this, there seems to be an increased
demand for coal preparation plants. Having already concluded a value by the cost
approach (and possibly the income approach), your investigation of the facts also
has disclosed two sales of coal preparation plants within the past year.
The first sale involved the purchase of an operating company, including both its
tangible and intangible assets. The company assets included the coal preparation
plant, a fleet of trucks, other above-ground mining equipment, and two long-term
contracts negotiated before the sale of the company. The company’s primary
business is to process coal for two nearby strip mines. You have been told that the
operating company was purchased for approximately $10 million. You talk to the
new owner who says the $10 million is “a little high,” but does not disclose the
exact purchase price; he adds that he “wanted the contracts.”
Based on the above information, you conclude that the first sale is not a valid
comparable to the subject property because this was a sale of an operating company
that included intangible assets, including contracts and other business enterprise
intangibles (such as net working capital). In addition, you have not been able to
obtain sufficient verified facts to serve as a basis of comparison.
The second sale involved the purchase of a coal preparation plant rated at 1,000
tons per day. The facility had been idle for two years before the sale. Its former
owner declared bankruptcy in the midst of a recession. The bank retained owner-
ship and contracted with a local equipment broker to maintain the facility and
subsequently to sell it in operating condition. It recently was purchased by a large
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coal company that relocated it so it could operate in conjunction with another of the
purchaser’s nearby operations (note that although the plant was idle for two years,
the purchaser clearly purchased it with the intention of operating it). The dealer
who sold the plant confirmed that the bank had held the asset, hoping the market
would rebound, which in fact it did. The dealer also said there was substantial
interest from many companies, but the facility was ultimately purchased by a
company that had another operation nearby.
The second sale plant was eight years old and required minimal capital expenditures,
since the broker operated the plant periodically to verify that everything worked.
The buyer tells you that the purchase price was $3.5 million and that an additional
$1.5 million was spent to dismantle, move, and install it at their nearby site. The
buyer is satisfied and feels the purchase was a good deal, because the current
replacement cost new of a plant of the same capacity is approximately $12 million
installed. The buyer is planning to operate the purchased plant at a mine with a
limited remaining economic life, estimated to be five years, and the purchase of a
new plant for that application could not be justified.
Since you rejected using the first sale, you are left with only this one market sale
of a coal preparation plant, and you must decide if this second sale can be used.
Although the plant was idle for two years before the sale, the buyer clearly purchased
it with the intention of operating it. You have confirmed with the dealer who sold
the plant that the bank held the asset hoping that the market would rebound, which
in fact it did. You also have learned that several buyers were interested in buying
the plant for continued use. On the basis of these facts, you decide this is a valid
comparable sale. In this situation, it would be appropriate to use the %age-of-
cost technique (discussed previously). The ratio of the $5 million purchase price
(including relocation cost) to the current cost new of $12 million is approximately
40% ($5 million ÷ $12 million = 0.417 or 41.7%, rounded to 40%).
The subject is somewhat less desirable than the comparable because it is a little
smaller and two years older, and the subject’s installation and other assemblage
value components are not new. Thus, because the subject is somewhat less
desirable than the comparable, something less than 40% of cost new would be
appropriate for the subject. For illustration purposes assume the conclusion that
35% is a reasonable ratio of value to cost new for the subject. If the cost new of the
subject is determined to be $10 million (it is smaller than the comparable, and so
the cost new would be less than $12 million), then the subject’s fair market value
in continued use is approximately $3.5 million ($10 million × 35%).
Once the $3.5 million conclusion of value is reached by the sales comparison ap-
proach it should be compared to the results indicated by the cost approach (which we
assume was also done). If the results of the cost approach are substantially higher than
$3.5 million, the sales comparison approach may be used as a basis to conclude the ex-
istence of additional depreciation (probably economic obsolescence). If the results of the
two approaches are reasonably close, both value conclusions are probably reasonable. If
the results of the cost approach are significantly lower than $3.5 million, the value derived
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by the sales comparison approach may be a more reasonable answer, reflecting additional
desirability in the marketplace.18
Key Points
• The MTS appraiser uses the sales comparison approach to indicate value by analyz-
ing recent sales (or offering prices) of property that are similar (i.e., comparable)
to the subject property. If the comparables are not exactly like the assets being
appraised, adjustments are made to the selling prices of the comparables to equate
them to the characteristics of the assets being appraised. The basic procedure is to
gather data on sales and offerings of similar properties, determine whether they are
for continued used or for an alternative use even if left in place, determine their
comparability to the subject property, determine the appropriate units of compari-
son, collect and array the data, analyze and adjust the data, and apply the results to
the subject.
• The sales comparison approach is most reliable when there is an active market
providing a sufficient number of sales of comparable property that can be inde-
pendently verified through reliable sources. Examples of assets generally having
markets meeting this definition include automobiles and trucks, computers, aircraft,
and standard machine tools, and other assets with an identifiable market.
• The sales comparison approach is not feasible when the subject property is unique.
Even if the subject property is not unique, the approach generally will not be fea-
sible if an active market does not exist. An inactive market or limited number of
sales of comparable property often indicates a lack of demand and may indicate
the existence of economic obsolescence, which may be measured using the income
approach or cost approach.
• The implementation of the sales comparison approach may differ significantly de-
pending on whether the subject is an individual asset, a related group of assets, or
an entire facility.
• The appraiser should remember that adjustments are made to the comparables, not
to the subject property. Elements of comparison are the comparable’s chronological
age and effective age, condition, capacity, location, size, date of sale, circumstances
of sale (e.g., level of trade or to a dealer, “as-is, where-is” condition), environmen-
tal compliance, safety compliance, and other factors.
• The three most commonly used techniques for establishing value of individual
items of machinery and equipment using the sales comparison approach are direct
match, comparable match, and percentage of cost.
• Using the sales comparison approach to appraise an installed group of related assets
or an entire industrial facility introduces complexities not encountered when ap-
praising a single asset. This is especially true when using the approach to appraise
the group or plant under the premise of fair market value in continued use or fair
market value–installed (capable of being used). In such a case, the appraised value
may be more appropriately found through the cost approach.
116
• Appraising machinery and equipment under the premise of continued use requires
adding to the value of the base units the value contribution of the costs (direct and
indirect) required to get the base units installed in the plant and ready to operate. In
effect, the appraiser converts the market price of the base unit into fair market value
in continued use or fair market value–installed (capable of being used) depending
on the proper application.
• One definition of fair market value in continued use includes an assumption that
there are sufficient business earnings to support the value conclusion as to the assets
in question. The appraiser has two options for dealing with the issue of sufficient
business earnings. Under fair market value in continued with assumed earnings,
the appraiser assumes, without verification, that there are sufficient earnings. Under
fair market value in continued with an earnings analysis, the appraiser uses income
approach methods to actually determine whether there are sufficient earnings.
• There are a limited number of situations in which it may be feasible to use the “whole
plant” sales comparison approach to value an entire industrial plant. This approach
often will not be feasible because most industrial facilities infrequently change
ownership; their unique characteristics make comparability difficult to evaluate and
adjustments difficult to quantify without undue speculation; most facilities change
ownership based on the parties’ perceptions of the present value of the future cash
flow that the facility is capable of generating; differences in profitability are crucial
and often explain the large difference in the selling prices of ostensibly comparable
facilities; the reported selling price of an industrial facility often includes the value
of net working capital; or the presence of other business enterprise intangibles or
other assets (such as land) that are not included in the subject property the appraiser
needs to value.
• Notwithstanding the above, there are situations in which these difficulties do not
exist or can be overcome, and in those cases the whole plant sales comparison
approach may be useful. The approach is best used when the comparables are virtu-
ally identical to the subject and have sold relatively recently in an active market.
The use of this approach requires extensive research and analysis of comparability,
adjustments, and other issues. Just as real property or business appraisers may need
to have an adequate understanding of MTS appraisal techniques, it may be that the
MTS appraiser will need to have an adequate understanding of business or real
property valuation, or work closely with appraisers from those disciplines.
Notes19
1
The sales comparison approach is sometimes referred to as the market approach or market data approach.
2
Comparable sales may not measure some of the types of obsolescence that the used market cannot reflect because of facts that may not
be apparent to outside parties, such as functional or economic obsolescence caused by (1) the relationship of the subject machine to other
machines in its production line (e.g., a production bottleneck ahead of the subject property); (2) the subject’s relationship to a building
or other structure in which it is located (e.g., lower productivity or other obsolescence caused by multiple buildings or poor layout); (3)
localized economic obsolescence due to regional raw material shortages; or(4) other conditions or circumstances that the used market
could not possibly reflect. Appraisers always should ask themselves what kinds of obsolescence the used equipment market is measuring
and what kinds of obsolescence it is not reflecting, and the appraiser then may need to make adjustments as appropriate.
117
3
In some instances, the income approach may be the best method for measuring economic obsolescence, but some forms of economic
obsolescence can be at least partially measured by the cost or sales comparison approaches; see discussion of economic obsolescence in
the cost and income approach chapters.
4
According to FAS 157, fair value requires the appraiser to value the assets in the most advantageous marketplace, which relates
market value to the level of trade. USPAP also requires the appraiser to address the appropriate level of trade. If the asset would provide
maximum value to a market participant in combination with other assets (i.e., its highest and best use is to be used as part of an ongoing
operation), then an in-use premise should be utilized. Under this scenario, the asset would assume to be sold, and consequently operated,
with the other assets in its group. Under this scenario, fair value relates to the MTS definitions of fair market value in continued use
or, under certain situations, fair market value–installed. However, if the asset would provide maximum value to a market participant
as a stand-alone asset (i.e., its highest and best use is to be sold on a stand-alone basis and removed), due to a lack of income support
or for any other reason, then another premise of value should be used. A valuation on this basis would assume that the assets would
sell independent of each other and not necessarily in concert with the other assets in its group. Under this scenario, fair value typically
relates to the definitions of fair market value as defined in this text. In some limited cases, such as under SFAS 144, fair value may relate
to the definition of orderly liquidation value as defined in this text. See Chapter 9 (Valuing for Financial Reporting) and the Glossary
for more details.
5
For this discussion, it is assumed that the sales by the used equipment dealers have already considered the used dealers’ costs of
dismantling and removal. When analyzing sales of comparable items, the appraiser may need to make adjustments for any such
dismantling and removal costs. In most instances, fair market value will not go below the amount for which a used equipment dealer
would sell the item.
6
The appraiser will have to use considerable caution and judgment concerning the handling of freight, taxes, and dismantling and
removal costs. While the subject’s initial installation may have incurred all applicable freight and taxes, these historical new costs may
not be the same as that which would be applicable to used costs; if they are significantly different, they could cause problems when
the appraiser attempts to correlate the results of the sales comparison approach with the results of the cost approach. Similarly, while
dismantling and removal cost may occur with used data, such costs obviously were not involved when the subject was first installed new,
and these costs also could cause reconciliation disparities that would need to be addressed by the appraiser.
7
Whether assemblage costs (i.e. freight, taxes, installation, and other such costs) should or should not be depreciated continues to be a
matter of debate even amongst members of the MTS Committee of the American Society of Appraisers. As of the date of publication
of this text, most appraisers take the position that appraisals for fair market value in continued use or fair market value–installed,
assemblage costs should be depreciated, and that is the position consistently adopted in this text. Most appraisers agree that when an
owner sells assets on an in continued-use or on an installed basis, or when a potential buyer of those assets purchases on that basis,
the transaction entails used assets and used assemblage costs and therefore the assemblage costs should be depreciated along with the
asset itself. However, there may be occasions when it is appropriate not to depreciate assemblage costs. This position arises most often
regarding insurance appraisals, especially where an actual loss has occurred, but differing opinions do arise regarding appraisals for
other purposes. Ultimately it is up to the appraiser to weigh all of the factors surrounding the purpose and intended use of any appraisal,
including the intent and terms of any insurance policy, to determine how to proceed.
8
See notes 2 and 7.
9
See notes 2 and 7, and further discussion below.
10
This assumption cannot apply to valuations performed for financial reporting purposes. For these appraisals, an overall business
enterprise valuation is typically performed as part of the valuation (by a business valuation firm), and as such economic support is either
indicated as being present or not being present. If it is present, the MTS appraiser should indicate this. If it is not there, this should be
indicated as well and the fair market value may have to be adjusted accordingly. (Also see note 4.)
11
The result was reflected as preliminary, because the adequacy of earnings issue had not yet been addressed.
12
The present value annuity factor for ten years at a discount rate of 12% is 5.650223 (see financial tables in Appendix C) or $60,000
× 5.650223 = $339,013.
13
The present value annuity factor would be the same as the previous calculation (see note 12), but the present value would be only
$169,507 ($30,000 × 5.650223 = $169,507).
14
It is important to note that any obsolescence penalties quantified by sales comparison, income, or cost approach methods cannot be
greater than the cost to cure the problem.
15
Fair market value as it pertains to MTS appraisals is sometimes also called fair market value – removed. In any case, the underlying
concept of machinery and equipment fair market value analysis is that the item being appraised probably will not remain where it
presently exists, as in the case where an appraisal is done on an in continued-use or installed basis. Confusion occurs in legal definitions
that usually have their root origin based in real property (i.e., land and its improvements thereon), where it is understood that the property
will not be removed. However, personal property is portable in nature and therefore often requires further expansion or clarification of
the definition of fair market value. Therefore, MTS appraisers use the terms of fair market value in continued use and fair market value–
installed to reflect installed properties and fair market value (and sometimes even fair market value–removed) to delineate properties
that are not to continue as installed properties.
16
See note 11. If the equipment is installed in a facility, the prudent buyer probably would not pay $200,000 for the line. Assume that
the buyer wants to purchase the given line and is willing to pay whatever it costs to ship it to the buyer’s facility but the buyer wishes to
pay no more than $200,000 for the line. If the line is still installed, and if the cost of dismantling and removal is estimated to be $30,000,
then the buyer probably would only offer $170,000 for the line. Buyers often knowingly or unknowingly make this type of analysis in
buying decisions, and the appraiser needs to be aware of these factors and make adjustments as appropriate.
118
17
The editors do not intend to imply that electrical generating facilities, as a class of property, necessarily meet the requirements
discussed above for use of this approach; the selection of this particular kind of property is for purposes of illustration only.
18
Remember that the results of the cost and sales comparison approaches also must be considered in light of the results of the income
approach.
Portions of this chapter were excerpted, with the author’s prior assent, from “Fair Market Value Concepts,” a chapter authored by
19
Robert S. Svoboda, ASA, in the book Appraising Machinery and Equipment (Herndon, VA: American Society of Appraisers, 1989).
119
5
Income Approach
Objectives:
1. Provide an understanding of the relevance of the income approach to
the MTS appraiser and the approach’s appropriate applications.
2. Provide a basic understanding of income approach theory.
3. Introduce the basic terminology relevant to the income approach.
4. Describe the development of discount and capitalization rates.
5. Outline the basic steps to perform an appraisal using the income
approach.
6. Demonstrate application of the income approach through an example.
The value of a property can be estimated by measuring its expected future benefit
to its owner. This is a widely accepted concept within the valuation community and among
those using valuations. The income approach to value is not used widely today by MTS
appraisers because of the difficulty in determining income that can be directly attributed to
a specific asset and the many variables and projections involved in this valuation approach.
However, in certain valuation problems, it can be a meaningful indicator of value.
While it is true that the MTS appraiser faces many challenges in applying an income
approach to value—and there are many instances in which this approach is not feasible—it
is also true that when properly applied, the income approach is a powerful valuation tool
that can enhance both the quality and credibility of the valuation, especially when used in
conjunction with other valuation approaches. Since USPAP specifies that the income ap-
proach be considered when necessary for credible assignment results, along with its degree
of applicability to the specific situation, the professional MTS appraiser must understand
this approach and its proper application.
The specific goals of this chapter are to help the MTS appraiser understand the
relevance of the income approach and its appropriate applications; to provide a basic un-
derstanding of income approach theory; to introduce the basic terminology relevant to the
income approach to value; to describe the development of discount and capitalization rates;
to outline the basic steps to perform an income approach to value specific assets or groups
of assets; and to demonstrate by example an application of an income approach applied to
the assets of a business. After completing this chapter, the reader will understand that the
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Income Approach
income approach may be a practical tool in the valuation of machinery, equipment, and
other property.
Theory
Present Value of Future Benefits
The decision to purchase any business asset, whether it is a piece of land, a building,
an operating business, an automobile, or an item of machinery or equipment, is typically an
investment decision. Investment decisions are based on the expected return to be generated
by the investment, the period of time over which the return will be earned, and the risk of
not receiving the expected return. The expected return, or discount rate, is based on the risk
of the investment, not the investor.
Investments are typically made in one of two forms: equity or debt. In an equity
investment, the primary party (the equity investor) purchases a property or an interest in a
property. With a debt investment, a lender loans money to a second party (the equity inves-
tor) for the purchase of a property or an interest in a property.
Before making an investment decision, the investor must understand all of the fu-
ture benefits from the investment. The range of benefits is almost limitless; some of the
more common ones include interest, dividends, capital appreciation, business synergies,
and tax incentives. Because these benefits typically accrue to the investor over time, an in-
vestor needs to know the current value of all the identifiable future benefits. An investment
decision is based on the present value of the future benefits to be earned by the investment,
and the value of a particular asset is represented by the present value of its expected future
benefits. This is the foundation for the income approach to value. The income approach is
a method for measuring the present value of the asset’s expected future benefits.
Time Value of Money

One of the essential concepts of the income approach is the time value of money:
one dollar received today is worth more than one dollar received in the future, because the
dollar received today can be invested and earn interest or other benefits immediately. One
dollar is worth more today because it can be used to buy goods and services today (i.e.,
it is liquid), and there is no risk associated with waiting (and potentially not receiving it).
The concept of the time value of money encompasses several important terms, including
present value, discounting, future value, and compounding.
Present value (PV) represents the value today of something that will be received in
the future. For example, if you were going to receive one dollar five years from now, what
would that future payment be worth if you received it today instead? The answer is that it
would be worth the amount of money that would need to be invested today, at a specified
interest rate or rate of return, in order to have one dollar five years from now. The process
used to determine the PV is referred to as discounting.
Another concept is future value (FV), the value in the future of something that is
owned today. For example, if you invested one dollar today, and received a 12% rate of
return for five years, the FV at the end of five years would be about $1.76. The process of
determining the FV is referred to as compounding.
In addition to the PV or FV of a one-time benefit, the PV or FV of multiple benefits
can be determined through discounting or compounding. A series of equal payments over
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Income Approach
time is called an annuity. The PV of an annuity is the value of a series of future benefits re-
ceived today. The reverse—the FV of an annuity—is the value of a series of future benefits
at a future point in time. Various generally accepted mathematical formulas for determin-
ing the present and future values of both one-time benefits and annuities are shown in Table
5.1.
1. Future Value—The FV of an amount today (PV) will be greater

when invested at a specific interest rate (i) such that the principal
(PV) plus interest earned increases based on the number of periods (n)
invested. The process of finding future values involves compounding.
FVn = Future value at the end of “n” periods

PV = Present value
i = Interest rate
n = Number of periods
FVn = PV x (1 + i )
n
2. Present Value—The PV of an amount for “n” periods in the future

is the amount which, if it were on hand today at a specific interest rate
(i), would grow to equal the future sum. The process of finding present
values is called discounting.
PV = Present value
FVn = Future value at the end of “n” periods
i = Interest rate
1
PV = FVn x
(1 + i )
n
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Income Approach
3. Future Value of an Annuity—The future value of an annuity

(FVA) is defined as the amount that a series of equal payments (PMT)
would grow to over fixed intervals for a specified number of periods
(n) at a specific interest rate (i). When the future values of each of the
payments are summed, their total is the future value of the annuity.
FVAn = Future value of an annuity for “n” periods

PMT = Periodic payment
i = Interest rate
 (1 + i )n − 1 
FVAn = PMT x  
 i 
 
4. Present Value of an Annuity—The present value of an annuity

(PVA) is the value of future payments (PMT) invested at a specified
rate (i) for a specified number of periods (n).
PVAn = Present value of an annuity for n periods

PMT = Periodic payment
i = Interest rate
1 1 
FVAn = PMT x  − 
 i i (1 + i )n 
 
Table 5.1. Time value formulas.
Rate of Return, Discount Rate, and Capitalization Rate

These three terms are essential to the income approach: rate of return, discount rate,
and capitalization rate.
The rate of return is the ratio developed when comparing income or yield to the
original investment. Virtually every investment, including one in machinery and equip-
ment, is made with the expectation of receiving a return from that investment. For example,
a stock or equity investor expects returns in the form of dividend income and/or stock price
appreciation above and beyond the cost of the original investment. Likewise, a property
owner investing in materials to build an apartment complex would expect to generate a
return in the form of rental income and/or property appreciation. In the same way, a start-up
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Income Approach
manufacturing company purchases machinery and equipment with the intention of using it
to generate income. Regardless of the investment—money, time, resources—the investor
expects or requires a certain return from that investment.
Investments are generally made with two basic goals in mind: achieving the re-
turn “of” the original investment—getting the original investment back—and receiving a
return “on” the investment—getting more than the original investment back or receiving
a “reward” for making the investment. There are virtually unlimited investment alterna-
tives, with varying degrees of risk. An important consideration in the investment decision
process is that the investment should provide a rate of return that is commensurate with the
investment risk. It is this return, in the form of income or cash flow generated by the asset,
that is quantified and discounted to estimate value using the income approach.
The discount rate is the rate of return used in discounting the future benefits gener-
ated by an asset or group of assets, to determine present value. When used to discount
future benefits, the required rate of return is called a discount rate. Remember, the discount
rate is based on the risk associated with the investment, not the investor.
The goal in determining any discount rate is to develop a rate that appropriately
compensates an investor for the relative risks inherent in investing in the subject versus
investing in alternatives. How the rate is determined is not as significant as its reflection of
the level of risk associated with the investment. The specific methodology chosen to de-
termine the discount rate depends a great deal on the purpose and context of the valuation.
The capitalization rate is the annual rate of return on and return of capital, equiva-
lent to the risk assumed by an investor. The capitalization rate (sometimes called “cap
rate”) is related to the discount rate; however, it is important for the appraiser to distinguish
between the two.
In a discounted cash flow (DCF) analysis, the discount rate is applied to a series of
cash flows projected over the life of the investment. The cash flows reflect changes in the
expected returns, whether declining, growing, or at times remaining constant. The discount
rate represents the total compound rate of return required by the investor over the life of
the investment.
In the capitalized income analysis, the growth of the expected returns is reflected
in the capitalization rate, rather than in the cash flow projections. The capitalization rate
is applied to only a single period of cash flow. That one period can be the prior period, an
average of several prior periods, or a projection of the first period immediately following
the valuation date. Typically, the period is a year. The analysis developed must reflect what
a prudent investor would expect as a cash flow projection into the long-term future. The
projection is considered a normalized, or stabilized, cash flow.
In summary, the primary difference between a DCF analysis and a capitalized in-
come analysis is where the projected growth is reflected. In a DCF analysis, it is in the an-
nual cash flow projections. In a capitalized income analysis, it is in the capitalization rate.
A capitalization rate is typically derived by removing the growth from the discount
rate; its formula follows:
Capitalization rate = discount rate minus projected growth of the earnings to be capitalized
For example, if the discount rate is 12% and expected long-term growth is 4% per
year, the capitalization rate is 8% (12% − 4%). Be aware that growth is not always posi-
124
Income Approach
tive; returns could be declining in a troubled or dying industry (with growth represented
by a negative number), level in a stable industry (zero growth), or increasing in a growing
industry (positive growth).
The expected long-term growth rate is not just inflation, although inflation may be
considered in the forecast. Inherently, in a capitalized income analysis, the cash flows are
capitalized into perpetuity.
Weighted Average Cost of Capital

To determine a discount rate, the appraiser must consider the rate of return that
is required by a potential investor in the investment or the asset. To accomplish this, the
weighted average cost of capital can be used. Figure 5.1 illustrates invested capital, and the
following discussion refers to this diagram.
Figure 5.1. Economic balance sheet.
Invested capital = The sum of the working capital, tangible assets, and
intangible assets, or
= The sum of long-term debt and equity, or
= The business enterprise value
Working capital = The necessary amount of the liquid assets needed
to operate the business during the projected period;
current assets minus current liabilities
Tangible assets = Those assets that are of a physical and material
nature (e.g., land, land improvements, buildings,
machinery and equipment, office furniture and
equipment)
Intangible assets = An asset having no physical existence yet having
value based on rights and privileges associated with
it (e.g., going concern value, goodwill, and other
intangibles such as contracts, assembled workforce,
computer software)
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Income Approach
Investments in a business typically are made in the form of debt and equity. Together,
they form the invested capital of the business (right side of Figure 5.1). The business then
takes that capital investment and buys assets (left side of the diagram). By determining the
costs of the capital investment in the business—the rates of return required by the investors
who are providing that capital—an indication of the relative risk involved with the subject
asset is obtained. The weighted average cost of capital (WACC) is the appropriate discount
rate when valuing the assets of a business by the income approach.
The WACC is an important concept to an investor. An investor’s cost of capital is
the return that must be provided to an investor for an additional capital investment, such
as in short-term debt, long-term debt, or preferred and common stock (equity). It also can
be referred to as the weighted rate of return that an investor requires on a company’s as-
sets, minus the company’s non-interest-bearing current liabilities. The cost of a business’s
capital is directly related to the investor’s perceived risk in investing in that business: the
greater the perceived risk in investing in a business, the greater the cost of that business’s
capital. Therefore, the investor does not consider the components of the cost of capital
(debt and equity) to be at equal risk. The risk is greater for an equity investor because, in
case of a failure of the business, the bond or debt holders will be compensated for their
investment first, and only then will any remaining funds be paid to the equity holders.
The WACC represents the after-tax return on the elements of invested capital
weighted by their relative percentage of the capital structure. The relative percentage of
these elements in the capital structure should be based on market data. Table 5.2 illustrates
the computation.
1 2 3 4 5
Capital Pre-tax Tax After-Tax Cost Weighted Cost
Structure Cost Effect* (Col. 2 × 3) (Col. 1 × 4)
Debt 40% 8.8% 60.0% 5.28% 2.11%
Equity 60% 17.0% 100.0% 17.00% 10.20%
WACC 12.31%
*The tax rate is assumed to be 40% in this example and hence, the tax effect multiplier is 60%.
(1 − 40%).
Table 5.2. Weighted average cost of capital
As shown in Table 5.2, WACC represents the after-tax return on the elements of
the business’s invested capital, weighted by their relative percentage of the total invested
capital. Note that capital structure is based on market values of debt and equity, not the
values reported in a company’s financial statements. An important point is that the returns
to the various forms of capital represent “marginal returns”—returns required on the next
dollar invested in the business, not the last dollar invested. The analysis is forward look-
ing. Therefore, as the business buys assets that have more risk attached, the required rate
of return on the capital being invested in the business increases. In addition, it is very
important that any asset purchased by a business generates a rate of return at least equal
to its cost of capital. An asset that cannot generate a large enough return is not a prudent
investment. However, some assets generate greater returns than do others. Finally, as table
5.2 demonstrates, the WACC is made up of the cost of equity and the cost of debt. Later
this chapter will show application of the WACC, or discount rate, to a debt-free after-tax
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Income Approach
net cash flow stream. In other words, the income (cash flow) projection does not include
deductions for interest expense on debt, debt repayment, or interest returns on investments.
The cash flow to be discounted reflects the rewards of ownership, which are utilized to pay
debt obligations and reward the equity owners of the business.
Cost of Debt
A business incurs debt when it borrows money from a capital provider. The loan
usually specifies an interest rate and a term for repayment. The cost of the debt to the busi-
ness is a function of the perceived risk related to the business’s ability to repay the debt.
The cost of debt has three components: a risk-free rate, an inflation factor (to account for
the loss in value of the dollar due to inflation over the term of the debt), and a premium for
risk.
In determining the cost of debt, the appraiser must consider both the market cost (a
function of price and interest rate) and the marginal cost (the cost on the next dollar bor-
rowed). It is also important that the after-tax cost of debt is used, because interest payments
on debt are usually tax deductible. Market data provide the cost of debt on a pre-tax basis;
therefore, the pre-tax cost must be multiplied by 1 minus the tax rate to derive the after-tax
cost for use in the WACC.
If the subject property is an industrial plant (not the large corporation owning the
industrial plant), the appraiser should note that as a “small business” it will have greater
difficulty obtaining debt financing than will a large company (or the owning corporation),
especially a large company that has equity traded on a stock exchange. One way to develop
the market cost of long-term debt for a small business property starts with considering the
yields on traded, rated debt such as that assigned Standard & Poor’s BBB or Moody’s Baa
bond rating, which in theory may reflect the risk of an investment in the subject property.
These bond ratings better reflect the risk of a single asset or plant than the risk of the parent
corporation that owns many plants in diverse industries (a diversified portfolio). However,
the appraiser should remember that this rate may not be available to a potential investor
in the subject property, depending on its size and other risk characteristics (i.e., the cost of
debt could be higher, reflecting a higher level of risk to the debtor).
Investor’s Required Return on Equity (Cost of Equity)

Two basic methods can be used to determine the cost of equity:
• The build-up (or summation) method
• The capital asset pricing model (CAPM) method
Both methods rely on data from the stock market to determine the cost of equity;
therefore, it is considered an after-tax cost.
Build-Up Method
The basic theory of the build-up method (sometimes referred to as the summation
method) is that it is possible to identify and quantify the various risk elements associated
with an equity investment. Once the risk elements have been identified and quantified, they
are simply added together to determine the rate of return required on the investment.
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Income Approach
Two models can be used to derive the investor’s required return on an equity invest-
ment (cost of equity). Table 5.3 illustrates build-up method number 1.
Data Inputs:
1. Risk Free Rate (Rf) 5.9%
2. Market Risk Premium (RPm) 5.0%
3. Size Premium (RPs) 3.4%
4. Industry Risk Premium (RPi) 3.5%
5. Site-Specific Risk Premium (RPu) 1.2%
The cost of equity is calculated by starting with the risk-free rate (Rf) and adding
relevant risk premiums:
Cost of Equity = Rf + RPm + RPs + RPi + RPu
Cost of Equity = 5.9% + 5.0% + 3.4% + 3.5% + 1.2%
Cost of Equity = 0.19 or 19%
Using this method, the required rate of return (cost of equity) is 19%.
Table 5.3. Build-up method number 1.
The basic concept shown in Table 5.3 is to start with a risk-free rate of return
and add the incremental risk premium(s) reflecting the risks inherent in the subject equity
investment. U.S. Treasury bills and U.S. Treasury bonds are generally considered to be
risk-free investments. In Table 5.3, the rate on the 20-year U.S. Treasury bond was used as
the risk-free rate. The longer-term U.S. Treasury bond rate is preferred by most appraisers,
because typical equipment investments are not short term. Quantification of the incremental
risk premiums can be difficult. An essential point to remember is that the build-up method
is not a rigid formula. Judgment must be used to assess the risk components that need to be
quantified on a case-by-case basis.
A second method used to estimate the cost of equity using the build-up method
involves adding a market-based risk premium to the cost of debt. Table 5.4 illustrates build-
up method number 2.
Data Inputs:
1. Cost of Long-Term Debt (Rd) 8.0%
2. Debt Risk Premium (RPm2) 6.5%
3. Additional Risk Premium (RP) 5.0%
The cost of equity is calculated by starting with the cost of long-term debt (Rd) and
adding the debt risk premium (RPm2) and the relevant additional risk premium (RP):
Cost of Equity = Rd + RPm2 + RP
Cost of Equity = 8.0% + 6.5% + 5.0%
Cost of Equity = 0.195 or 19.5%
Using this method, the required rate of return (cost of equity) is 19.5%.
Table 5.4. Build-up method number 2.
This method is simple and straightforward. The debt risk premium (RPm2) can
be derived from data published by Ibbotson Associates (a wholly owned subsidiary of
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Income Approach
Morningstar Inc.) in Stocks, Bonds, Bills and Inflation Yearbook. The cost of debt (Rd) is
developed from the cost of industrial bonds, and the additional risk premium (RP) is added
to reflect a small-company risk, a specific-company risk, an illiquidity premium, or the
inherent risks of a single plant. The advantage of this method is that the cost of debt and
the debt premium are both derived from a published source. The only judgment required
of the appraiser is in quantifying the additional risk factor, again, on a case-by-case basis.
CAPM Method
The capital asset pricing model (CAPM) is one of the more widely discussed and
used developments in modern financial theory. William F. Sharpe, Harry M. Markowitz,
and Merton H. Miller originally formulated the CAPM, for which they received the Nobel
Prize in Economics in 1990, to measure the cost of equity capital. This model is based on
the fact that investors require a rate of return, above a risk-free rate, as compensation for
bearing the risks inherent in their investments. In simple terms, the CAPM technique sug-
gests that the required rate of return on an asset is a function of some risk-free rate of return
plus a risk “premium,” which depends on the amount of risk associated with the asset or
investment. The risk premium is determined as a function of the volatility of the asset’s
price in the marketplace over time, relative to the volatility of prices in the marketplace as
a whole over the same period.
CAPM, like build-up method number 1, uses the risk-free rate of return. This method
also uses the concept of beta, defined as the measure of the volatility of the subject invest-
ment’s return relative to the volatility of returns in the marketplace as a whole. The beta
for an individual equity investment reflects its risk relative to that of equity investments in
general. The beta can be computed, but in many instances has been already computed and
published in various reports. Beta measures the risks associated with the industry in which
the subject property competes; hence, beta measures the systematic risk within an industry.
It may not include any property-specific risk, which is considered the unsystematic risk.
Because beta is derived from comparable companies in an industry the same as
or similar to that of the subject property, the market-based beta inherently includes the
effects of the debt structure of the comparable companies. It is considered a levered beta.
To remove the effect of the comparable company debt structure, the individual company
beta can be unlevered (removing the specific debt effect on beta) and then relevered to the
amount of debt used in the capital structure of the subject.
For example, if the price of an individual stock in the marketplace increases 10%
while the prices of all stocks in the marketplace increase 10%, and then the price of that
individual stock decreases 10% while the prices of all stocks decrease by 10%, the volatil-
ity of that individual stock would equal the volatility of the market. The stock’s beta would
be equal to 1.0. If the price of a stock increases 20% while the prices of all stocks in the
market increase 10%, and that stock’s price then decreases 20% when all stock market
prices decrease 10%, that individual stock would have twice the volatility of the market
as a whole. The individual stock would have a beta of 2.0. Alternatively, if the stock price
increases 5% while stock prices in the market increase 10%, and then decreases 5% while
stock prices in the market decrease 10%, the volatility of the stock would be half that of the
market as a whole. This individual stock would have a beta of 0.5. The higher the beta, the
more potentially volatile the stock’s price.
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Income Approach
Several methods to unlever and relever a beta are available. The formula in Table
5.5 commonly is used to unlever a published beta so it will represent a beta that reflects
100% equity in the capital structure.
Data Inputs:
1. Levered Published Beta (ßL) 1.3
2. Comparable Company Tax Rate (t) 40.0%
3. Debt in Comparable Company Capital Structure (Wd) 30.0%
4. Equity in Comparable Company Capital Structure (We) 70.0%
The unlevered beta (ßU) is calculated as follows:
ßU = ßL ÷ [1 + (1 − t) × (Wd ÷ We)]
ßU = 1.3 ÷ [1 + (1 − 40.0%) × (30.0% ÷ 70.0%)]
ßU = 1.3 ÷ (1 + 60.0% × 43.0%)
ßU = 1.3 ÷ 1.258
ßU = 1.03
Using this method, the unlevered beta is 1.03.
Table 5.5. Unlevering beta.
The next step, relevering the beta, involves adjusting the unlevered beta with the
capital structure and tax rate of the subject company, as shown in Table 5.6.
Data Inputs:
1. Unlevered Beta (ßu) 1.03%
2. Subject Company Tax Rate (t) 35.0%
3. Debt in Subject Company Capital Structure (Wd) 50.0%
4. Equity in Subject Company Capital Structure (We) 50.0%
The relevered beta (ßL) is calculated as follows:
ßL = ßU × [1 + (1 − t) × (Wd ÷ We)]
ßL = 1.03 × [1 + (1 − 35.0%) × (50.0% ÷ 50.0%)]
ßL = 1.03 × (1 + 65.0% × 100.0%)
ßL = 1.03 × 1.65
ßL = 1.7
Using this method, the relevered beta is 1.7.
Table 5.6. Relevering beta.
The mathematical process of relevering the unlevered beta using the capital struc-
ture and tax rate of the subject company adjusts for the magnitude of financial leverage in
the subject company.
The next component of the CAPM method is the equity (market) risk premium.
Currently, no single standard for estimating RPm has been universally accepted. The meth-
ods commonly used can be broadly categorized into two approaches: the historical return
approach and the forward-looking return approach.
The historical return approach employs the premium that investors have realized,
on average, over a historical holding period. The underlying theory is that past market per-
formance indicates how the market will behave in the future, and investors’ expectations
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Income Approach
are influenced by the historical performance of the market. The historical return market risk
premium is generally the historical mean of the difference between the equity market rate
of return and the risk-free rate (published sources of this information are available through
Ibbotson Associates), as shown by the following formula:
RPm = Large Company Stock Return − Long-Term Government Bond Income Return
Between 1926 and 2007, an average yield of 7.1% was determined by using the his-
torical return approach and the preceding formula. Some analysts believe that this percent-
age is too high and backward-looking. The argument against the historical return approach
is that valuation is a forward-looking concept, not an exercise in mechanical application of
formulas. Valuation requires applying value drivers reflective of the current market, which
may include forward-looking estimates such as those implied from projections of future
prices, dividends, and earnings.
The forward-looking approach bases the market risk premium on historical real-
ized returns greater than a risk-free rate, represented by long-term government bonds (as
discussed previously), as well as expected and forward-looking market risk premium esti-
mates. Analysts reviewed various data sources and studies spanning many years, generat-
ing a broad range of market risk premium indications. The market risk premiums reflective
of the current market range as of the publication of this text, is between 5.0% and 6.0%,
slightly lower than the average yield of 7.1% calculated from historical returns per the
Ibbotson Associates studies.
As it is based on historical factual returns, the historical return approach tends to
be objective. The forward-looking approach tends to be more subjective, allowing the ap-
praiser to use historical analyses and current thinking to opine on a market risk premium. It
is up to the appraiser to study historical returns, the current market, and the risks inherent
in the subject property and in the cash flow projections to develop a market risk premium
appropriate for the subject analysis.
The last component is the additional risk premium, which represents unsystematic
risk in the specific property being appraised that is not captured by the beta. Specific prop-
erty risks include operation as a single stand-alone plant versus multiple plants in diverse
industries, small size compared with the competition, and illiquidity, among others.
Simply stated, the CAPM method to calculate an equity return requirement is based
on the concept that any stock’s required rate of return is equal to the risk-free rate of return
plus the stock’s risk premium. The basic CAPM model is shown in Table 5.7.
E(Ri ) = Rf + ß(RPm) + RP
Where:
E(Ri) = Investor’s required return on equity for the subject property
Rf = Risk-free rate as of the valuation date
ß = Beta of the industry based on comparative stocks
RPm = Market risk premium
RP = Additional risk premium
Table 5.7. The capital asset pricing model.
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Income Approach
The main advantage of using CAPM is that its inputs are largely derived from the
marketplace. It is therefore less subjective than the build-up methods. CAPM’s disadvan-
tage is that it employs certain assumptions that may be considered unrealistic. For example,
CAPM assumes no transaction costs, no taxes, and near-perfect market liquidity. Even with
its shortcomings, however, CAPM remains a frequently employed method for determining
the investor’s required return on an equity investment.
Market-Derived Discount Rate

An alternate method is sometimes used to derive the discount rate: the market-
derived discount rate methodology utilizes a known purchase price for a property similar
to the subject property and the actual financial analysis utilized by the buyer to determine
the purchase price. The primary problem with this approach is that the buyer most likely
developed multiple financial analyses (DCFs), testing many different projections and oper-
ating scenarios that were utilized to negotiate a purchase price. Although the purchase price
is known, a meaningful forecast is unlikely to be available. When this approach is possible,
the appraiser is warned to carefully analyze the information utilized to ensure that it reflects
correct and meaningful data.
Discount Rate Adjustments

Regardless of how it is derived, the discount rate is designed to match the level of
cash flow to be discounted. If any operating expense is omitted from the cash flow (e.g.,
property taxes are appropriately omitted in an appraisal for property tax purposes), the
discount rate must be adjusted to reflect that omission in the cash flow. Because the omis-
sion of an expense item increases the cash flow to be discounted, the discount rate must be
adjusted upward to reflect the increased cash flow so that the resultant value will be similar
to the value that would have been indicated had no operating expense been omitted.
Summary
In summary, the value of any asset is represented by the present value (PV) of
its expected future benefits. This is the foundation of the income approach to value. To
determine the present value, the MTS appraiser must understand the concepts of time value
of money (present value [PV] and future value [FV]), discounting and compounding, and
annuities. The appraiser must also understand the rate of return, and that every investment,
whether in land, buildings, or machinery and equipment, is made with the expectation of
obtaining a return both of and on the investment. In addition, the appraiser needs to un-
derstand the discount rate and the various methods of determining it. These basic concepts
form the income approach model, which will now be discussed.
The Basic Steps

The income approach has nine basic steps:
1. Identify the expected future benefits (cash inflows).
2. Determine the magnitude and timing of the future benefits.
3. Determine the magnitude and timing of the expenses associated with achiev-
ing the forecasted revenue (cash outflows).
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Income Approach
4. Subtract the annual operating expenses from the annual revenue.

5. Derive the discount rate (or capitalization rate if a multiple-year model is not
being used).
6. Determine the present value of the annual net cash flows.
7. Estimate the terminal value of the asset.
8. Calculate the business enterprise value.
9. Develop the appropriate value of the asset.
The first basic step in the income approach is to identify the expected future benefits
(basic step 1). These are usually in the form of the specific income generated by the asset.
However, in many cases the only identifiable income stream relates to the entire business,
not a specific asset. (In this case it may be possible to consider the income of a machine as
a percent of its contribution to the business value exclusive of the business name, support
staff, and so forth. For instance, if the income of the business returns a business value of
$1,000,000, and the estimate of the machine’s contribution is 50%, then the value of the
machine could be $500,000.) If an asset (or group of assets) does not generate any income
(e.g., it is not in use or not capable of being used), or if an identifiable income stream
related to the asset cannot be derived, then it is important to note that it may not be possible
to appraise that asset using the income approach.
If an income stream can be associated with the asset or group of assets, then the
next step is to determine the magnitude and timing of the future benefits (basic step 2). This
usually involves forecasting the total revenues generated by the asset, annually, over its
remaining normal useful life. Historical income generated by the asset, forecasts prepared
by the asset’s owner, or industry forecasts can be used in this process. Integral to this
step is determining the estimated remaining normal useful life of the asset. This can have
a significant impact on the value conclusion. In addition, when reviewing the subject’s
historical operations, the appraiser should study the historical utilization or capacity factor
(actual production divided by maximum design production), since the appraiser may want
to forecast a normalized or stabilized level of performance that eliminates peaks or valleys
in the revenue forecast. Such peaks and valleys are normal for many businesses, especially
plants operating in a commodity (process) industry where the economics of supply and
demand affect the prices of the products produced and the raw materials purchased.
When the revenue (income) forecast is complete, the next step is to determine the
magnitude and timing of the expenses associated with achieving the forecasted revenue
(basic step 3). These expenses can be variable or fixed, direct or indirect, discrete or con-
tinuous, cash or noncash. Interest and debt repayment are not included as expense items
because they are influenced by the parent corporation. As indicated earlier, the discount
rate is derived in such a manner that interest and debt repayment are not in the cash flow
to be discounted.
The next step is to subtract the annual operating expenses from the annual revenue
(basic step 4). The result is the annual net income that the asset will generate over its
estimated remaining life. It is typical to determine a net cash flow after taxes by subtracting
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Income Approach
income tax from pre-tax operating income to obtain net income, adding back depreciation
expense and other noncash expenses, and deducting future capital expenditures and incre-
mental changes in working capital (current assets minus current liabilities).
When the net cash flow forecast is complete, basic step 5, which is to derive the
discount rate (or capitalization rate if a multiple-year model is not being used), is then
applied. The key to this step is analyzing the relative risk associated with both the asset and
the forecast and ensuring the risk is reflected in the discount rate. Again, the discount rate
must reflect the risks inherent in the cash flow projection, not the risk inherent in the parent
company. This is one of the main areas where income approach valuations are challenged.
The appraiser should derive the discount rate carefully and be able to support it.
The next step in the basic model is to determine the present value of the annual net
cash flows (basic step 6) by applying the discount rate to the net cash flow forecast. The
sum of these discrete present values represents the value of the operation over the forecast
period.
The next step, which is sometimes considered the salvage value or residual value,
is used to derive the present value of the operations in the last period of the forecast—es-
timate the terminal value of the asset (basic step 7). An analysis concerning the life of the
operations must be developed. If the asset has a limited life (the operations end at the last
period in the forecast), the terminal value is the present value of the net salvage or scrap
value of the operations in the future. If the asset is a business whose life may be very long,
the terminal value is the present value of the capitalized future value; the capitalized value,
in a future period, reflects the value of the operations into perpetuity. In both cases, the
future value for the last forecast period is discounted to present value at the appraisal date.
After all present values have been developed, to calculate the business enterprise
value (basic step 8), add the present value of the annual net cash flows to the terminal value.
The final step—to develop the appropriate value of the asset (basic step 9)—is
dependent on the specifics of the valuation. For example, if the valuation is for a complex
facility such as an industrial plant, the cash flow forecasts include both the returns of and
the returns on all the assets of the plant. This would include land, land improvements, build-
ings, machinery and equipment, working capital, and any intangible assets. To estimate the
value of the machinery and equipment, the appraiser must subtract the values for these
other assets. If the valuation is for a property that is typically leased, and an asset-specific
cash flow is developed, then once the discounted cash flow is determined and terminal
(salvage) value is added, if appropriate, the valuation process is complete.
Successful performance of these basic steps results in an indication of value using
the income approach. The actual application of this approach can be more complicated than
indicated in this basic model. However, no matter how complex the situation, the basic
concept remains the same.
Application
To this point, discussion in this chapter has been centered on basic financial theory,
introducing important terms and providing a conceptual income approach model. This
section introduces more specific terminology and demonstrates the theory with an actual
cash flow model, along with derivations of specific inputs into that model. The model is
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Income Approach
presented as part of a relatively simplified example of the income approach as it applies to

the valuation of an industrial facility.
It is virtually impossible to present a universal model to appraise machinery and
technical specialty assets using an income approach, because the MTS category is broad
and every asset or facility is unique. The basic model requires adjustment for each ap-
praisal situation in order to be properly applied. By understanding the theory and following
the basic application model, the appraiser can make the proper modifications.
As we have seen, the income approach determines the present worth of future ben-
efits (income) of ownership. It is not usually applied to individual items of machinery and
equipment unless they are leased. However, it frequently is used to value a group of assets
or individual machine units that are utilized together to produce a marketable product and
that, in aggregate, generate an income stream. This collection of assets, along with any
intangible and working capital assets, is frequently referred to as a business enterprise or
going concern. A business enterprise may be defined as all tangible assets (property, plant,
equipment, and working capital) and intangible assets of a continuing business. In terms
of the value of the total invested capital, it is the combination of the value of stockholders’
equity and the enterprise’s long-term debt.
Two techniques are typically used to value machinery and equipment by the income
approach: (1) the direct capitalization method or capitalized income method and (2) the
discounted cash flow (DCF) method. The direct capitalization method measures value by
dividing an income stream, in constant dollars, by a capitalization rate. Remember, the
change in growth is reflected in the capitalization rate. The DCF method is a form of
analysis in which the quantity, variability, timing, and duration of periodic income and the
residual value are projected, and the periodic income and residual value then discounted to
present value using a discount rate.
These methods establish the value of an asset or group of assets assuming the entity
is a going concern or business—that the operating assets being valued will remain in place
and in use, at their highest and best use, as part of a continuing and operating unit or
business.
To apply the income approach, the forecasted income stream must be positive. A
positive income stream indicates that the business enterprise is a going concern, with future
benefits of ownership. If the forecasted income stream is negative or zero, implying that
the business is losing money, or at best breaking even, the assets must be valued under a
premise of removal (net salvage). In theory, the assets should be deployed elsewhere to
maximize their value.
Examples of the two income approach techniques follow.
Direct Capitalization Method

The direct capitalization method simply capitalizes a projected net income or cash
flow (expected future benefits) into perpetuity. It assumes that there will be no variation in
the capitalization rate and no termination of the income stream (income into perpetuity).
Two steps are required: (1) projecting the income, and (2) deriving the capitalization rate.
To project the income, one must investigate and analyze the relevant market to
identify data for comparable leased assets that can be adjusted to reflect an income for
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Income Approach
the subject asset. Adjustments may be made for such factors as time (market conditions),
location, size, and age, among others, as appropriate.
The capitalization rate is derived by investigating and analyzing sales of similar
leased assets, as discussed for the market-derived discount rate approach. It is important
that the sale and lease data analyzed are for assets physically and economically similar to
the subject asset. The capitalization rate is calculated by dividing the income of the sold
asset by the sale price to determine the rate. This rate is frequently referred to as the overall
rate because it captures all variables and risks associated with a particular income stream.
The formula is stated as follows:
Income
= Capitalization Rate
Price
The comparable rates obtained from the market investigation are reviewed and ad-
justed for comparability with the subject asset(s) to develop a capitalization rate. This rate
can then be applied to the income projection for the subject asset(s), as follows:
Subject Income Projection

= Income Approach Indication of Value
Capitalization Rate
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Income Approach
Example: Development of an Income Indicator or Value

The subject machine is frequently leased in the marketplace; hence, an income
approach is believed to be appropriate. The appraiser ascertained, from calls made
to bankers, used equipment dealers, manufacturers, and other appraisers, that the
following annual leases had been signed recently:
Last month $1,000

Last week $1,000
Last year $970
The first two leases are at the same terms as the subject’s, while the third lease is at
a lower rate. Assuming all the comparable machines are identical to the subject, the
third comparable lease apparently needs to be adjusted upward (time adjustment).
If the appropriate price increase was 3%, the adjusted lease rate
is $999 ($970 × 1.03). Therefore, an income of $1,000 per year is a reasonable

projection for the subject machine unit. Note that removing 3% for inflation from
the discount rate implies that the annual income will increase at the rate of 3%
(i.e., rental rate changes move at a constant 3%) and this must be verified for
reasonableness during the investigation.
A similar investigation was performed to derive the capitalization rate. Two sales
of similar machines were identified, as summarized in Table 5.8:
Annual Derived Cap

Sale Date Sale Price Income Rate*
1 Last Week $5,300 $800 15.1%
2 Last Week $7,300 $1,200 16.4%
*Derived Cap Rate = Annual Income / Sale Price
Table 5.8. Capitalization rates derived from sales.
The two sales reviewed in this analysis reflect a range of 15.1% to 16.4% and
a mean of 15.8%. So, 15.5%, slightly lower than the mean, was concluded to
be reasonable. (Note: This was a subjective conclusion based on the appraiser’s
experience and judgment.)
The above data are used to develop an income approach indication of value for
the subject machine unit as follows:
Subject Income Projection $1,000

= = $6,452
Capitalization Rate 15.5%
Thus, the direct capitalization method of the income approach results in a rounded
value indication of $6,500.
Capitalization rates may also be derived using the build-up method, using the band
of investment method, or by employing the constant growth (or Gordon-Shapiro) model:
discount rate (WACC) less projected growth rate.
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Income Approach
DCF Method
The discounted cash flow (DCF) method is most frequently developed on a debt-
free, net cash flow basis. The DCF technique results in the value of the business enterprise
associated with a going concern.
This technique measures the direct economic benefits derived from ownership,
in the form of future cash inflows and outflows attributed to the property, stated at their
present value. Cash inflows are derived from income plus noncash expenses (depreciation
expense). Cash outflows arise from future operating and general/administrative expenses,
future capital expenditures, and any required influxes of working capital necessary to sup-
port growth and sales revenue. When the DCF method is utilized to determine the value
of the tangible assets associated with the operating business of a manufacturing or process
plant, care must be taken to exclude any cash inflows or outflows not associated with the
operations being valued, such as interest income or expense, insurance claim payments, or
asset sale receipts.
The following discussion of the DCF method provides an example of its applica-
tion, highlighting typical inputs to a DCF model considering the subject property to be an
operating manufacturing plant valued as of a specific date, the appraisal date.
Schedule of a Typical DCF Model

The following schedule represents the basic model that is used to restate the facil-
ity’s actual historical operating statements and forecast the future in a DCF analysis.
Revenues
Revenues represent the gross sales revenue from operations. They must not include
interest income or other incomes from non-operating assets. Projected revenues may be
based on past historical results, in-house projections, published industry data, or a combi-
nation of these. For process plants and other industrial facilities, revenues are derived by
multiplying the production quantity by the selling price of the finished products.
Cost of Raw Materials

All manufacturing and product-related material costs are included as the cost of
raw materials. This cost includes not only raw materials but also intermediate materials and
blendstocks. Raw material costs are based on the amount of materials required to manu-
facture the products included in the revenues and the projected purchase prices of those
materials. Price projections may be based on past historical results, in-house forecasts,
published industry data, or a combination of these.
Gross Margin
Gross margin is calculated as follows: revenues less cost of raw materials. This
level of earnings most closely reflects the effect of outside influences within the property.
The gross margin per unit (e.g., cost per pound, barrel, etc.) can be a useful tool in quantify-
ing economic obsolescence in the cost approach by comparing changes over time.
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Income Approach
Operating Expenses
As used in this chapter, the term operating expenses includes all expenses as-
sociated with achieving the projected revenues that are not included in the cost of raw
materials. These include labor, labor-related overheads, maintenance, supplies, chemicals,
catalysts, electricity, fuel, depreciation, sales and marketing, general and administrative,
corporate overhead, rent and lease, property taxes, and insurance (this list is intended to be
illustrative rather than exhaustive). Interest on long-term debt is not an expense item and
should not be deducted in arriving at net cash flow; otherwise, only equity will be valued,
and not the total invested capital. Projections of operating expenses may be based on a
review of past operating results, forecasts, published industry data, or a combination of
these. Certain items quantified as operating expenses can be used in the cost approach to
identify operating obsolescence, primarily labor and energy (electricity and fuel), as these
are site-specific expense items.
Operating Income
Operating income is calculated as follows: gross margin minus total operating
expenses.
Earnings Before Interest, Taxes, Depreciation, and Amortization

Earnings before interest, taxes, depreciation, and amortization (EBITDA) are cal-
culated as follows: operating income plus depreciation expense. EBITDA is a useful level
of income to compare against because it excludes the effects of interest expense and debt
repayment, depreciation, and the tax structure of the subject facility and its owner company.
Sometimes referred to as the net margin, this level of income is frequently compared with
that of similar facilities to check or verify the reasonableness of historical operating results
or projections. Doing so also provides a multiyear analysis of the earnings capability of the
subject operations, net of any accounting or tax-related influences.
Income Taxes 1
Income taxes must reflect the composite federal and state income tax rate.
Net Income
Net income is calculated as follows: operating income less income taxes (assuming
operating expenses are as defined above).
Depreciation
Adding back depreciation expense to net income results in what is sometimes called
gross cash flow.
Future Capital Expenditures

It is essential that future capital expenditures (CAPEX) be sufficient to support
the growth in revenue, earnings, and cash flow that are being projected. Estimation of the
capital expenditures required to support a given set of growth assumptions is based on
the property’s projected 5- or 10-year CAPEX budget or a percentage of the reproduction
cost new. If real or inflationary growth is projected during the specific forecast or in the
terminal period, the projected growth must be supported by capital expenditures in excess
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Income Approach
of depreciation. If zero growth is assumed, capital expenditures are appropriately equated

with depreciation.
Working Capital Changes

Working capital changes are the amount the business invests in operating working
capital. It is generally calculated based on a percentage of revenue change. If revenues are
increasing, working capital additions will be positive, under the theory that if a business
is growing it requires additional working capital to help sustain that growth. Conversely,
if the business is shrinking, it will require less and less working capital. For example, if a
business is growing, the magnitude of its inventory and supplies will also need to grow;
hence, the working capital requirements will grow. Of course, working capital is not just
inventory; it is current assets minus current liabilities. Working capital is derived from the
market, frequently by studying the same comparable companies utilized in the discount
rate development.
Debt-Free Net Cash Flow

Debt-free net cash flow is calculated as follows: net income plus depreciation minus
capital expenditures minus (or plus) working capital changes. This is sometimes referred
to as free cash flow. Net cash flow is the total after-tax cash flow generated by the going
concern and available to the providers of the facility’s investment capital: stockholders
(equity) and creditors (debt). This level of cash flow rewards the equity investors for the
risk they endured in making the investment and repays the creditors in the form of interest
on debt and principal repayment.
Forecast Period
The number of years included in what is called the “specific forecast” period is
based on several factors, such as the economics of the subject industry and the economics
and physical attributes of the subject property. If the subject assets are physically very old
and obsolete, the remaining life of the property may be very short. Although it is possible
to spend large amounts of money to rebuild a facility, it may not be economically prudent.
In such a case, the forecast period could be very short and the final year would represent
facility shutdown and the liquidation of the assets (salvage or terminal value).
In cases where the property has a long remaining life, the DCF theoretically could
be forecast at 100 years, but after 30 years or so, the present value of the net cash flow is
so small that the exercise is moot. Once the changes in net cash flow begin to stabilize
2
(generally after 5, 10, or 15 years), the net cash flow stream is capitalized into perpetuity.
Discount Rate Derivation

The estimation of an appropriate discount rate, or WACC, is fundamental to any
computation of present value (basic step 5 as listed in the previous section, The Basic
Steps). The following are components of developing the WACC:
• Capital structure analysis
• Cost of debt analysis
• Cost of equity analysis
• Calculation of the discount rate
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Income Approach
As part of the WACC analysis, companies in the subject’s industry (called “guide-
line companies” in business valuation) are studied. Although these companies may not be
entirely similar to the subject because of size and other operating characteristics, they are
generally affected by the same economic factors and are viewed as reasonably comparable
for the purpose of estimating the cost of capital.
Capital Structure Analysis

The guideline companies for a sample analysis are listed in Table 5.9, with long-
term debt and equity expressed as a percentage of total capital structure and working capital
expressed as a percentage of revenues.
Guideline Working Capital Long-Term Debt Equity
Company (% of Revenue) (% of Capital Structure) (% of Capital structure)
Company A 10 45 55
Company B 12 40 60
Company C 8 35 65
Company D 9 40 60
Company E 10 45 55
Company F 11 40 60
Table 5.9. Capital structure of guideline companies
This type of data is available from various sources such as The Value Line Invest-
ment Survey, Standard & Poor’s, annual stockholder reports, U.S. Securities and Exchange
Commission (SEC) filings, and other publications. The typical capital structure for the
subject’s industry is developed based on the capital structure of the guideline companies.
Long-term debt and equity must be at market rates, not as reported by accountants. For the
purpose of this sample analysis, the appropriate guideline company capital structure was
determined to be 60% equity and 40% debt.
The selected capital structure may or may not be similar to the actual capital struc-
ture of the subject property. If the subject property is a small division of a large corporation,
it may not have a capital structure and may contribute only a small income stream to the
large company. In this case, the capital structure of the large corporation may not be reflec-
tive of a company in the subject’s industry.
Cost of Debt Analysis

Stockholders and debt holders require compensation for investing in a property
with a similar level of risk to the subject’s. This compensation is often called the opportu-
nity cost. The cost of equity is equivalent to the return required by an equity investor for
an investment comparable to the subject property. The cost of debt is the required cost of
interest on debt for a loan on a property comparable to the subject. Note that a high percent-
age of debt in the capital structure increases the cost of debt because lenders consider high
leverage risky.
After the capital structure is determined, the rates of return required in the capital
markets are reviewed. The market rates, reported by Standard & Poor’s Monthly Bond
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Income Approach
Guide, Moody’s Bond Guide, The Wall Street Journal, the Federal Reserve Board, and
many others, are summarized in Table 5.10, and represent the average rates as of the ap-
praisal date for this example only.
Yield %
Prime Rate 6.00
Short-Term Government Bills 5.13
Intermediate-Term Government Notes 5.63
Long-Term Government Bonds 6.74
Industrial AAA Bonds 7.29
Industrial BBB Bonds 8.80
Table 5.10. Rates of return required in capital markets
A small business, such as the subject facility, can be expected to have greater dif-
ficulty obtaining debt financing than larger companies, especially those with equity traded
on a stock exchange. One way to develop the market cost of long-term debt for the subject
starts with considering the yields on traded, rated debt, such as debt with S&P’s BBB bond
rating, which had an 8.8% yield on the appraisal date. However, depending on the size and
other risk characteristics of the subject facility, this rate may not be available to a potential
investor in the subject. Although 8.8% has been used as the cost of debt in this example, it
should be noted that using yields on traded, rated debt might understate the cost of debt for
a small business such as the subject facility. Quantifying the additional risk is a complex
3
issue.
Cost of Equity Analysis

The CAPM method may be used to relate the return that equity investors require
to the risk-free return offered by government securities. To account for relative risks for
specific industries, the additional returns or risk premium required by the market in general
can be adjusted by a beta factor (β). CAPM uses the following formula to arrive at an ap-
propriate cost of equity:
E(Ri) = Rf + β (RPm) + RP
Where:
E(Ri) = Investor’s required return on equity for the subject property
Rf = Risk-free rate
β = Beta based on an analysis of guideline company stocks
RPm = Market risk premium
RP = Additional risk premium
The risk-free rate, as approximated from the yields on long-term U.S. Treasury
securities, was estimated at 6%. This is based on the yields on intermediate-term (10-
year) and long-term (20- to 30-year) government securities (see Table 5.10: 5.63% for
intermediate-term government securities and 6.74% for long-term government securities).
Historically, the market risk premium has been developed based on the return of
the market in excess of the historical risk-free rate, based on a study of returns between
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Income Approach
1926 and the appraisal date (the Ibbotson Associates data). The historical return approach
employs the premium that investors have actually realized over a holding period. The his-
torical market risk premium has been estimated at about 7.1%, and is based on the underly-
ing theory that the past provides an indication of how the market will behave in the future.
Investors’ expectations are influenced by the historical performance of the market. Some
analysts believe that the market risk premium should be more forward looking, rather than
backward looking. In this analysis, a market risk premium of 6% is used.
The beta component of the equation reflects the risk of the specific investment rela-
tive to the return of the overall stock market. The investigation included a review of betas
for companies in the subject’s industry, as reported by The Value Line Investment Survey.
The analysis indicated that the companies reviewed have betas generally between 0.80 and
1.15, and an average beta of about 0.98. Hence, for this analysis a beta of 1.0 was chosen.
As indicated previously, the individual guideline companies, the weighted betas, and the
relevered betas should be reviewed and analyzed to develop the beta appropriate for the
subject property.
The final component of the equation is the additional risk premium, which includes
the small-company risk premium, the specific-company adjustment, and/or the illiquidity
premium. The additional risk premium is not part of the basic CAPM model and generally
is not used to calculate cost of equity if the subject property is a large, liquid, publicly
traded business. (Note that in this example, the subject property is assumed to be something
other than a large, liquid, publicly traded company. Because the subject property is a single
stand-alone industrial facility, for purposes of this example, we assume that an additional
risk premium of 5% is appropriate.)
Employing the CAPM methodology, the cost of equity was estimated as follows:
E(Ri) = Rf + β(RPm) + RP
E(Ri) = 6.0% + 1.0 (6.0%) + 5.0%
E(Ri) = 17.0%
Calculation of Discount Rate

The WACC is then calculated by weighting the cost of debt (tax-affected at 40% to
4
reflect the deductibility of interest expense) and the cost of equity by the industry capital
structure indicated in an analysis of guideline companies. In the example, the typical mar-
ket-based, industry capital structure is composed of 40% debt and 60% equity. Therefore,
a WACC of 12.3% was calculated, as shown in Table 5.11.
1 2 3 4 5
Capital Pre-Tax Tax After-Tax Cost Weighted
Structure Cost Effect* (2 x 3) Cost (1 x 4)
Debt 40% 8.8% 60.0% 5.28% 2.11%
Equity 60% 17.0% 100.0% 17.00% 10.20%
WACC 12.31%
*The tax rate is 40%.
Table 5.11. Weighted average cost of capital.
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Income Approach
This discount rate is intended for application to an after-tax, debt-free net cash flow.
At this level of cash flow, interest earnings on other investments are not added to revenues,
interest expense is not an expense item, and debt repayment is not a deduction.
Occasionally, certain states and financial institutions require net cash flow streams
to exclude income tax and depreciation, and/or property tax. The discount rate must be
adjusted to reflect the nature of the income to be discounted. The appropriate adjustments
can sometimes be difficult to estimate, but if they are made correctly, the final result will
not be affected.
Example Using the Basic Steps

The subject property’s historical operating statements for the past five years are
shown in Table 5.12. These simplified, comparative historical operating statements are a
starting point in identifying the expected future benefits, as outlined in The Basic Steps,
basic step 1.
5 Years Ago 4 Years Ago 3 Years Ago 2 Years Ago 1 Year Ago
Revenue 84,935 88,474 92,160 96,000 100,000
Cost of Raw Materials −53,118 −54,760 −56,454 −58,200 −60,000
Gross Margin 31,817 33,714 35,706 37,800 40,000
Operating Expenses −17,706 −18,253 −18,818 −19,400 −20,000
Depreciation −3,453 −3,559 −3,670 −3,783 −3,900
Operating Income 10,658 11,902 13,218 14,617 16,100
Table 5.12. Sample historical operating statements.
Income taxes are not shown as an expense item because they are based on a specific
corporate structure and do not reflect the marginal statutory rate of the subject property.
Remember, when valuing a specific operating property, the current owner of the property is
not taken into consideration, nor is its tax structure. The appraisal includes just the subject
property, as a stand-alone operation. Taxes, reflective of the subject operations as a stand-
alone business, will be deducted in the DCF model.
Historical trends in the industry, future projections of industry economics, and the
subject property’s past operating results are used to determine the magnitude and timing
of the future benefits and the costs of achieving the forecasted income stream (basic steps
2 and 3). The major assumptions, projections, and calculations used in the business enter-
prise valuation for the subject property are explained as follows:
• Revenues and the cost of raw materials are projected to increase or decrease
based on short- and long-term industry projections. Primary industry projec-
tions are based on data published in industry publications and consultants’
reports. The throughput, or magnitude of raw material inputs, affects both
the revenues produced and the amount of raw materials required. Forecast
throughput typically is based on the normalized historical throughput ad-
144
Income Approach
justed for any changes that might be supported by any CAPEX invested in
the operations. Precise annual throughputs can be projected, with subjectivity.
• Operating expenses are based on historical operating results and are estimated
to increase based on historical growth. Corporate overhead may be restated
to industry norms.
• Operating income is the gross margin less operating expenses. Income taxes
are calculated based on the composite state and federal rate of 40% (in this
example). Net income is operating income minus income taxes.
• Net cash flow is net income plus depreciation expense, minus future capital
expenditures, minus (or plus) working capital changes. Working capital re-
quirements can be based on a review of the working capital requirements of
guideline companies or the specific requirements of the subject facility. The
amount of future capital expenditures was based on the long-term require-
ments of the facility.
To complete basic step 4, subtract expenses from revenue. Basic step 5 was dis-
cussed previously in the Discount Rate Derivation section of this chapter.
The cash flows are discounted to present worth at an appropriate discount rate over
the 10-year (in this example) projection period (basic step 6). For the terminal period be-
yond Year 10, the projected cash flow is capitalized into perpetuity employing the constant
growth (Gordon-Shapiro) model; the denominator of the fraction is the discount rate minus
the projected cash flow rate of growth. The resulting capitalized value is converted to
present worth (the terminal value) using the present value factor at the end of Year 10/
beginning of Year 11 (basic step 7). Note that present value factors for the interim years are
5
applied at the midyear point.
The value of the subject property as a viable operating entity into the future is equal
to the sum of the present values of the projections of cash flow plus capitalization of the
projected residual cash flow, the latter of which is also discounted to present value (basic
step 8).
Table 5.13 illustrates a simplified income approach for the subject property.
145
146
Year 1 2 3 4 5 6 7 8 9 10 Terminal
A Revenue 105,000 110,250 113,558 116,964 120,473 122,883 125,340 127,847 129,126 130,417 133,025
B Less Cost of Raw Materials (61,800) (63,654) (65,564) (67,531) (69,556) (71,643) (73,792) (76,006) (78,286) (80,635) (82,248)
Income Approach
C = A-B Gross Margin 43,200 46,596 47,994 49,433 50,917 51,240 51,548 51,841 50,840 49,782 50,777
D Less Operating Expenses

E Fixed and Variable Expenses (20,600) (21,218) (21,855) (22,510) (23,185) (23,881) (24,597) (25,335) (26,095) (26,878) (27,416)
F Depreciation (3,900) (4,095) (4,218) (4,344) (4,475) (4,564) (4,655) (4,749) (4,796) (4,844) (4,941)
G=E+F Total Expenses (24,500) (25,313) (26,073) (26,854) (27,660) (28,445) (29,252) (30,084) (30,891) (31,722) (32,357)
H=C-G Operating Income 18,700 21,283 21,921 22,579 23,257 22,795 22,296 21,757 19,949 18,060 18,420
I=H x Rate Income Tax (7,480) (8,513) (8,768) (9,032) (9,303) (9,118) (8,918) (8,703) (7,980) (7,224) (7,368)
J=H-I Net Income (Debt Free) 11,220 12,770 13,153 13,547 13,954 13,677 13,378 13,054 11,969 10,836 11,052
K+F Depreciation 3,900 4,095 4,218 4,344 4,475 4,564 4,655 4,749 4,796 4,844 4,941
L Capital Expenditures (5,200) (5,300) (5,410) (5,520) (5,630) (5,740) (5,850) (5,970) (6,090) (6,210) (4,941)
M Working Capital Changes - (525) (331) (341) (351) (241) (246) (251) (128) (129) -
N=J+K-L-M Debt Free Net Cash Flow 9,920 11,040 11,630 12,030 12,448 12,260 11,937 11,582 10,547 9,341 11,052
O Period (n) 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5
P Present Value Factor 0.9436 0.8403 0.7483 0.6663 0.5933 0.5283 0.4705 0.4189 0.3731 0.3322
Q=N*P Present Value 9,361 9,277 8,703 8,016 7,385 6,477 5,616 4,852 3,935 3,103
Table 5.13. Sample Income Approach

R Sum of PV of Cash Flows
in Years 1-10 66,725
S=Z Terminal Value 35,645 Terminal Cash Year Flow 11,052
T=R+S Business Enterprise Value 102,370 Discount Rate 12.30%
U Working Capital 10,500 Cash Flow Growth Projection 2%
V=T-U Value of Tangible Capitalization Rate 10.30%
and Intangible Assets 91,870 Capitalized Value 107,301.0
W Value of Intangible Assets 11,870 PV Factor (9.5 Periods) 0.3322
X=V-W Value of Tangible Assets 80,000 Terminal Value 35,645
Income Approach
The cash flow for the last year of the specific forecast period (Year 11 in this ex-
ample) is $11,052 and is capitalized into perpetuity using a capitalization rate derived from
the discount rate using the constant growth (Gordon Growth) model.
If zero growth into perpetuity is assumed, the capitalization rate for converting the
terminal-year cash flow into a capitalized value is the same as the discount rate of 12.3%
(12.3% − 0.0%). If the appraiser assumes growth in cash flow of 2% into perpetuity, the
numerator of the capitalized value fraction would be $11,052 and the denominator would
be 10.3% (12.3% − 2.0%). In the example, the capitalized value is calculated by dividing
$11,052 by 10.3% ($11,052 ÷ 10.3% = $107,301). This figure represents the future value
of the facility, assuming the facility will be operated into perpetuity.
This future value then must be adjusted to the appraisal date. This is done using
the present value formula illustrated in Table 5.1, which multiplies the future value of
$107,301 by the present value factor of 0.3322 (the midyear present value factor in Year
10). The result is a terminal value of $35,645 (basic step 7). It is a common misconception
that the terminal value is discounted an additional period (n). In this example, the Year
10 cash flow is discounted 9.5 periods; it is assumed that the Year 10 cash flows will be
received in the middle of Year 10. The terminal value is then based on the next period’s
cash flow as of the midpoint of Year 10, or n = 9.5, and represents the value of the property
at the end of n (9.5) periods. Since the end of Year 10 (n = 9.5) is the same as the beginning
of the next period (the terminal period), they represent the same point in time. Hence, they
must be discounted for the same number of periods (9.5).6
When this terminal value is added to the sum of the present values of the cash flows
for Years 1 through 10, the result is the business enterprise value, which in the example is
$102,370 (basic step 8).
As noted previously, a business enterprise has three components: working capital,
tangible assets, and intangible assets. In the financial analysis, it was concluded that the
appropriate working capital on the valuation date was 10% of revenue, or $10,500 based
on the revenue forecast in Year 1 of $105,000.
Deducting the working capital from the business enterprise value results in an in-
dication of value of $91,870 for the subject’s tangible and intangible assets. This figure in-
cludes the value of all tangible and intangible assets, including machinery and equipment,
real property (buildings, other structures, site improvements, and land), personal property,
and intangible assets. In this example, the value of the intangible assets is $11,870; hence,
the value of the tangible assets is $80,000 (basic step 9).
The values of the real property and intangible assets are typically developed by
appraisers experienced in real estate and financial valuation. The intangible component
of value may or may not be significant to the accuracy of the appraisal, depending on the
7
facility’s level of profitability and other factors. If the appraiser needs to bring the income
approach value indication down to the level of value of the machinery and equipment, his
or her task is to determine the values of the real property and intangibles and deduct these
from the total value of the tangible and intangible assets.
DCF analyses also can be developed on a pre-tax basis. The primary differences
in applying the DCF method would be removal of the expense items for depreciation and
income taxes and adjustment of the discount rate to match the level of cash flow to be dis-
counted. The result would be a larger cash flow in the analysis and a higher discount rate.
147
Income Approach
The pre-tax discount rate is commonly calculated by dividing the after-tax discount rate by
one minus the composite state and federal income tax rate. The resultant value indication
will be different, but similar.
Commonly, appraisers must develop DCF analyses for property tax purposes. Be-
cause the goal is to calculate the property tax, which is derived from the value of the prop-
erty, the appraiser omits property taxes as an expense, and therefore also must adjust the
discount rate for the missing expense. For example, if the effective property tax rate was
2%, the discount rate was 12.3%, and the income tax rate was 40%, the adjusted discount
rate would be 13.5% (12.3% + [2% (1 − 40%)]).
Key Points
• The income approach is a method to measure the present value of a property’s
expected future returns.
• A decision to purchase any property is an investment decision. Investment deci-
sions are made in consideration of the expected return to be generated from the
investment, the period of time over which the return will be earned, and the risk of
not receiving the expected return.
• The time value of money concept is that a dollar received today is worth more
than a dollar to be received in the future, because the dollar received today can be
invested and earn interest. Present value (PV) represents the value today of some-
thing that will be received in the future. For example, if you were going to receive
one dollar five years from now, what would that future payment be worth if you
received it today instead? The answer is it would be worth the amount of money
that would need to be invested today, at a specified interest rate or rate of return,
in order to have one dollar five years from now. The process used to determine the
present value is referred to as discounting.
• Investments are generally made with two basic goals in mind: achieving the return
of the original investment—getting the original investment back—and receiving
a return on the investment—getting more than the original investment back. An
important consideration in the investment decision process is that the investment
should provide a rate of return that is commensurate with the investment risk. It is
this return, in the form of income or cash flow generated by the asset, that is quanti-
fied and discounted to determine value using the income approach.
• The discount rate is used to bring the future benefits generated by an asset to present
value. Someone who buys, or invests in, a piece of machinery or equipment expects
the equipment to provide a return both of and on the investment, usually in the form
of income or cash flow. Valuing an item of equipment using the income approach
requires determining the present value of the expected future benefits from that
equipment.
• The weighted average cost of capital (WACC) is an appropriate discount rate when
valuing the assets of a business by the income approach. A company’s cost of capi-
tal is the return that it must provide to investors for additional capital, that is, short-
148
Income Approach
• term debt, long-term debt, and preferred and common stock (equity). The discount
rate must reflect the risk inherent in the investment, not the investor.
• The most common methods for estimating the investor’s required return on equity
are the capital asset pricing model (CAPM) method and the build-up method. Both
the CAPM and build-up methods must include adjustments to reflect the risks in-
herent in the specific investment appraised.
• Two techniques are typically used to value machinery and equipment by the income
approach: the direct capitalization method and the DCF method. The direct capital-
ization method measures value by dividing a projected income stream, in constant
dollars, by a capitalization rate. The DCF method is a form of analysis in which
the quantity, variability, timing, and duration of periodic income and the residual
value are projected; the periodic income and the residual value are then discounted
to present value using a discount rate.
• The direct capitalization method simply capitalizes a projected net income or cash
flow into perpetuity. It assumes that there will be no variation in the capitalization
rate and no termination of the income stream. It is a single-period model.
• The DCF method is most frequently developed on a debt-free, net cash flow basis.
This eliminates the effects of how the actual business is currently being financed
and taxed and also recognizes the future cash outflows that are necessary to achieve
the projected cash flows. The DCF method results in the value of the business
enterprise associated with a going concern. It is a multiple-period model.
• The discount rate used in the DCF method may be estimated by determining the
subject property’s WACC. It is calculated by weighting the cost of debt and the cost
of equity.
• The DCF method results in the business enterprise value of an operating business,
which includes the values of the working capital, the tangible assets (real property
and personal property including machinery and equipment), and intangible assets.
A value for machinery and equipment is calculated by making the appropriate de-
ductions from the business enterprise value.
• The income approach is a practical, useful tool that may be applicable to certain
machinery and equipment appraisal projects. However, because the income ap-
proach is complex, the reader is referred to business valuation literature, real estate
valuation literature, and investment texts for further study.
Additional Reading
Brealey, Richard A., Stewart C. Myers, and Franklin Allen. Principles of Corporate
Finance. 9th ed. New York: The McGraw-Hill Companies, Inc., 2008.
Cornell, Bradford. Corporate Valuation: Tools for Effective Appraisal and Decision
Making. New York: The McGraw-Hill Companies, Inc., 1993.
149
Income Approach
McKinsey & Company, Inc., Tim Koller, Marc Goedhart, and David Wessels. Valuation:
Measuring and Managing the Value of Companies. 4th ed. Hoboken, NJ: John Wiley &
Sons, Inc., 2005.
Pratt, Shannon P. Cost of Capital: Estimation and Applications. 2nd ed. Hoboken, NJ: John
Wiley & Sons, Inc., 2002.
Pratt, Shannon P., and Roger J. Grabowski. Cost of Capital: Applications and Examples.
3rd ed. Hoboken, NJ: John Wiley & Sons, Inc., 2008.
Pratt, Shannon P., with Alina V. Niculita. Valuing a Business: The Analysis and Appraisal
of Closely Held Companies. 5th ed. New York: The McGraw-Hill Companies, Inc., 2008.
Notes
1
Composite Income Tax Rate = Federal Rate + [State Rate (1 − Federal Rate)].
2
Unlike corporations, tangible assets have finite useful lives; thus, capitalizing the terminal cash flow into perpetuity may not be
appropriate, especially if the facts indicate that the subject tangible asset has a relatively short remaining useful life. In this case, the
appraiser may decide to forecast each year’s cash flow during the asset’s estimated remaining life and then forecast the salvage value (if
any) that would be realized at the end of the asset’s life.
3
For additional guidance, see Hal B. Heaton’s “Valuing Small Businesses: The Cost of Capital,” in The Appraisal Journal (January
1998), p. 12. In addition, the appraiser may be able to identify debt rates actually available to small companies similar in size and risk
to the subject facility.
4
The composite federal and state income tax rate is used.
5
Although midyear present value factors are used in this example, end-of-year present value factors or factors representing a continuous
flow of funds also can be used.
6
See the discussion of this issue in pages 27–32 of Cost of Capital: Applications and Examples by Shannon P. Pratt and Roger J.
Grabowski (Hoboken, NJ: John Wiley & Sons, 2008)
7
For additional guidance on the valuation of intangibles, the appraiser may wish to review Gordon V. Smith and Russell L. Parr,
Valuation of Intellectual Property and Intangible Assets, 3rd ed. (New York: Wiley & Sons, 2004), and Robert F. Reilly and Robert P.
Schweihs, Valuing Intangible Assets (New York: McGraw-Hill, 1999).
150
6
The Three Approaches to Value
for a Process Plant
Objectives:
1. Describe the use of the three approaches to value by using a process
plant valuation as an example.
2. Demonstrate the applications of the three approaches to value.
3. Discuss the correlation of value.
Overview
The preceding Cost, Sales Comparison, and Income Approach chapters discussed
each of the possible valuation approaches. The reader should read and fully understand all
of the preceding chapters before undertaking this chapter. To facilitate the application of all
three approaches, this chapter uses a process plant as an example. This chapter will
• Identify the types of properties that can be considered process plants
• Discuss the nature of a process plant
• Explain some of the terminology commonly used in the industry
Nature and Economics of a Process Plant

A process plant converts raw materials into a more valuable slate of marketable
products. Some typical process plants and their primary raw materials and finished prod-
ucts are identified in Table 6.1.
151
The Three Approaches to Value for a Process Plant
Type of Process Plant Primary Raw Materials Finished Products

Brewery Grains, hops, water Beer
Citrus juice plant Oranges, limes, additives Orange juice, lime juice
Electric generating Natural gas, oil, coal,
plant uranium, water, wind Electricity
Crude oil, intermediates, Gasoline, diesel, fuel oil,
Oil refinery blendstocks sulfur, coke
Olefins plant Natural gas or naphtha Ethylene, propylene
Pharmaceutical plant Various chemicals Various drugs
Polypropylene, other
Polymers plant Ethylene, propylene thermoplastics
Sugar mill Sugar cane or beets Refined sugar
Tire manufacturing Carbon black, oils, sulfur,
plant steel Automobile and truck tires
Table 6.1. Representative Process Plants
A process plant is physically constructed with multiple process or machine units

designed to modify the physical structure of raw materials into finished products. There-
fore, the individual items of machinery and equipment in a process plant tend to lose their
identity and are viewed as part of an entire system rather than individual components,
although they may need to be analyzed on a component basis.
The quality of raw materials used may differ based on the geographic location of
a plant relative to a local source or its location relative to the world market. Raw material
differences influence the design of the plant. For example, because crude oils processed
during the early 21st century typically are heavier (higher density of oil relative to water)
and more sour (higher sulfur content) than those processed in most of the 20th century, oil
refineries, like most process plants, are under increasingly stringent environmental con-
straints and are becoming more complex (i.e., using additional process units) to meet the
demands of the more severe processing required. This makes oil refineries not only more
expensive to build, but more expensive to operate. Oil refineries that process light (low-
viscosity) sweet (low-sulfur) crudes may have the same capacity of heavy (high-viscosity)
sour (high-sulfur) oil refineries, but because of the lower level of processing required in
light sweet crude oil refineries, they need fewer process units, and therefore are less expen-
sive to build and operate.
Process plants generally are considered a risky business because they produce com-
modities (e.g., beer, orange juice, electricity, gasoline) and margins swing wildly due to
fluctuating factors such as weather, world raw material prices, required maintenance sched-
ules, government regulations, alternative energy sources, and local and global economic
activity. The commodity market can be cyclical or seasonal, and generally is unpredictable.
Process plants typically utilize technologically complex and expensive machinery
and equipment to convert naturally developed raw materials into high-value products. Both
the raw materials and the finished products may be global commodities that vary in value
based on supply, demand, and competition; thus the industry’s economics and the value
152
of the process plants are influenced highly by outside forces, beyond the control of the
individual plants. Obsolescence issues are common in process plants because technology
is constantly changing, leading to improved efficiencies in the production process. In ad-
dition, changing world commodity prices constantly are affecting the economics of the
industries in which the process plants operate.
When valuing a process plant, an appraiser should investigate the industry in which
the plant operates, to study the technology used and the price trends of the raw materials
required and products produced. Technology should be studied for trends in construction
costs and manufacturing efficiencies. The appraiser must ask, “What would a modern re-
placement be, what would it cost, and how would its operating expenses differ from those
of the subject plant?” The answers to these questions are useful in quantifying functional
obsolescence due to excess capital costs and excess operating expenses (operating obso-
lescence). Economic obsolescence also may exist when raw material prices increase while
prices and demand for products produced remain steady or grow at a slower rate, reducing
the process plant’s profitability.
When appropriate, sale transactions within the industry should be investigated.
Some types of process plants are sold as complete operating units, and analysis of the trans-
actions can be meaningfully developed into a sales comparison approach. However, since
they are complete operating units, the process plants often are sold with more assets than
just the tangible real and personal property. If a process plant is sold as an operating plant,
the transaction may include intangible assets such as a trained and assembled workforce
and management team, operating manuals and procedures, engineering drawings, software,
permits, emission allowances, contracts and agreements, and customer lists. Often, the mo-
tive for a transaction is not the tangible assets, but the intangible assets, especially contracts
and agreements that guarantee the owner an income stream. Operating plant transactions
also often include working capital, such as raw material and product inventory and other
current assets. Sale transactions, with proper analysis, also can be useful in quantifying
depreciation and obsolescence.
Valuation Overview
In formulating an opinion of the value of a process plant, an appraiser typically
holds discussions with management concerning the history and nature of the operations
conducted at the property, including recent activity and future economic prospects. The
information requested includes studies of the subject property and its operations, operating
and expense data, equipment and building lists, drawings, flow diagrams, and other records,
along with cost and expense estimates and documents pertaining to the property’s opera-
tion. Current and future environmental equipment investments are especially important, as
the size of the investment and the increased operating expense could be substantial. This
data typically is analyzed and reviewed with management for reasonableness. Historical
information provides a good basis to start the investigation, as it reflects the actual operat-
ing performance of the plant being valued.
Value usually is determined by giving consideration to the three approaches to
value: cost, sales comparison, and income. Each method is analyzed to determine its ap-
plicability to the plant being appraised, based on the nature of the property, the nature of
153
the market, and the availability of data. Even if all approaches are used, more weight may
need to be given to one method if that method proves to be more applicable than the others.
Cost Approach
The cost approach is used to estimate the value of property based on the current cost
of the subject assets, minus physical deterioration, functional obsolescence, and economic
obsolescence. In the cost approach, an analysis must be made of the property that is actu-
ally and physically being appraised, with consideration given to its design capacity and
utilization, its physical condition, and its operating characteristics as compared with a new
modern facility. This approach also requires an analysis of the economics of the plant and
its industry. The appraiser must be familiar not only with the plant’s physical attributes,
but also with its capabilities, technical attributes, and economics, making the cost approach
include not only the valuation but also making it an engineering and economic analysis.
Although buyers and sellers do not thoroughly develop the cost approach, they are
familiar with the cost of new construction, the physical attributes and condition of the plant
being reviewed, the operating characteristics of the subject in comparison with a modern
plant, and the economics of ownership. The appraiser utilizes all of the above engineering
and market information to develop a cost approach indication of value. The cost approach
is the only indicator of value that identifies and values only the tangible assets; it does not
include any intangible assets (unless they are specifically added).
In the cost approach, the maximum value of a property to a knowledgeable buyer
is the amount currently required to erect or construct a new plant of equal utility, i.e., the
replacement cost new. Because the process plant subject to appraisal typically is not new,
the current cost new must be reduced by the impact of all of the forms of depreciation
(physical deterioration, functional obsolescence, and economic obsolescence) attributable
to the property at the appraisal date.
Current Cost New

The first step in the cost approach is to determine the proper level of current cost,
either reproduction cost new or replacement cost new. These costs are defined in Chapter 3
(Cost Approach) and the glossary of this text. When two or more structures, process units,
or off-sites (assets supporting the process units) are available with like utility and capacity,
the principle of substitution comes into play, and the one with the lowest overall invest-
ment and production costs is regarded as the most desirable from an economic standpoint.
For example, new technology is usually a more expensive investment than old obsolete
technology, but the cost of production is often significantly lower (due to factors such as
better energy efficiency, smaller workforce requirements, or greater yield). Therefore, even
though its cost is higher, new technology represents the current cost, because from a long-
term perspective the present value of the reduced operating expenses, over the life of the
plant, usually will be much lower. Therefore, whenever market value must be determined,
cost and production cost factors must be analyzed carefully to properly establish the basis
for developing the estimated current cost new.
The development of reproduction cost new is the first step in applying the cost
approach only if reproduction is the most practical and economical course available to a
prudent investor. If reproduction is not physically possible because specific construction
154
materials are no longer available or is not technically feasible due to advances within the
industry, the proper basis for beginning the cost approach becomes the replacement cost
new and it is not necessary to establish the reproduction cost new.
Replacement cost new is typically the upper limit of value, or what a prudent inves-
tor would consider the property to be worth in new and unused condition under the eco-
nomic and technological conditions as of the appraisal date. In most situations, it becomes
the proper current cost basis for developing the cost approach.
Once the current cost is determined, deductions are made for physical deterioration,
functional obsolescence, and economic obsolescence.
Physical Deterioration
Physical deterioration in a process plant typically is quantified utilizing three tools:
a physical inspection, an age/life relationship, and, together with these, information pro-
vided by the engineering and maintenance staff responsible for the operations. A physical
inspection provides visual information concerning the operating plant’s maintenance and
housekeeping practices. The appraiser should be aware that a fresh coat of paint can hide
major problems within a process unit or piece of equipment. Often, plant engineering or
inspection records provide meaningful information about the plant equipment’s physical
attributes. The trended historical cost can help in estimating the average age of the in-
vestment in the equipment, which then can be used in an age/life relationship to measure
depreciation. The age/life relationship tends to be an analytical method to quantify physical
deterioration, but also needs to be reviewed for reasonableness based on the physical in-
spection and information obtained from discussions with the engineering staff and a review
of their inspection records. No one knows the positive and negative attributes of the opera-
tions better than the staff responsible for running the plant. All three tools can be utilized
to assess the level of physical deterioration inherent in the plant. A process plant typically
operates under high-pressure or vacuum conditions, frequently at high temperatures, with
many moving parts. Process units have equipment with limited lives, but the replacement
of worn-out parts tends to limit the amount of physical deterioration in the operating plant,
thus reducing its effective age and allows the plant to continue to operate in a safe and
reliable condition.
Another step in developing the cost approach is to determine functional obsoles-
cence. Functional obsolescence is a form of depreciation in which the loss in value or
usefulness of a property is caused by inefficiencies or inadequacies of the property itself,
compared to a more-efficient or less-costly replacement property that new technology has
developed. Changes in technology affect the design, construction cost, and operating char-
acteristics of plants. This loss in value normally is expressed by the appraiser as excess
capital costs and/or operating obsolescence (the present value of excess operating expense
penalties).
Excess capital cost is defined in the glossary as a type of functional obsolescence
that typically results from changes in production or construction methods, equipment use,
etc. In the context of this chapter, it is the amount that was spent to build, subsequently add
to, or remodel the plant that exceeds the investment required to erect a modern replacement
155
plant, because the modern replacement would incorporate technological advances and bet-
ter construction materials or methods. When the replacement cost is the starting point of the
cost approach, it is not necessary to calculate excess capital cost. When the reproduction
cost is the starting point, this form of obsolescence, if present, is measured by comparing
the reproduction cost of the subject property with the cost of a new modern replacement
facility of equivalent capacity, utility, and desirability. Normally, the reproduction cost new
is higher than the replacement cost new. Occasionally, the cost of a modern replacement
plant is higher than the reproduction cost new due to the price of current technology; in
this case, the modern replacement will be more efficient and thus have lower operating
expenses. However, if the higher cost of replacement represents betterment, this betterment
needs to be accounted for and the replacement cost new adjusted accordingly.
Operating obsolescence is a penalty that the existing property continues to incur in
the form of higher operating expenses than would be necessary in a replacement property.
It is measured as the present value of the excess operating expenses from continued opera-
tion of the inefficient existing property, compared with a modern replacement facility’s
operating expenses. The annual excess operating expense is discounted over either the
remaining life of the subject property or the remaining period for which the operating
deficiencies are anticipated to be incurred, whichever period is shorter. The discount rate
selected is commensurate with and comparable to the present industry return on similar
investments. Typically, the discount rate used in the operating obsolescence analysis is
lower than the discount rate used in the income approach because the penalty forecast is
less risky than the cash flow projections in the DCF analysis.
The operating penalty is measured based on operating efficiency factors only, in-
dependent of physical conditions existing in the property. The operating costs selected
for comparison are only those that are either controllable by process design and operating
adequacy or incurred on site as a result of the direct production operations. For process
plants, the typical operating penalties to be investigated include an oversized workforce,
high energy consumption, high chemical and catalyst consumption, low product yield or
production, and any other attribute that decreases the subject plant’s earnings in compari-
son to the modern replacement. Examples follow:
• The size of the workforce needed is reduced in process plants with more ef-
ficient and technologically superior layouts. Most process plants have under-
gone piecemeal construction over many years of expansion and environmental
modifications, incorporating multiple process units and different generations
of technology. This increases the size of the workforce required not only to
operate but also maintain the plant. Modern plants have a smaller “footprint,”
fewer process units, and one central control room and utilize a similar level of
technology throughout, resulting in a smaller required workforce and a lower
labor expense.
• Consumption of energy, as both electricity and fuel, is a major operating ex-
pense of process plants. Modern technology utilizes equipment with better in-
sulation, more efficient motors, and shorter pipe runs between units. Because
modern plants have fewer but larger units that occupy a smaller footprint,
156
energy consumption is reduced. Reduction of this major operating expense is

especially important as the costs of electricity and fuel increase.
• The cost of chemicals and catalysts is reduced in modern process plants be-
cause fewer, larger units perform the same function as the older, obsolete
plants.
• The value of the yield or production at a modern plant is improved, resulting
in increased revenues. A modern oil refinery can produce a higher-value slate
of products with the same raw material input due to technologically advanced
process units and more balanced design (i.e., no bottlenecks). For some types
of plants, a modern replacement may generate a lower level of scrap or out-of-
specification products. A modern electrical generating plant may participate
in the market more frequently, and thereby generate more electricity. In every
case, the revenue of the modern replacement plant is higher due to increased
yield or production.
Because every plant and every industry is different, care must be taken to develop
the analysis of a new modern replacement based on the operating characteristics of the
subject being appraised. The replacement should reflect what a knowledgeable participant
in the market would build as of the appraisal date. It does not have to use the same tech-
nology but does have to produce the same or a similar slate of products. The technology
inherent in the replacement does not have to be in use by a plant currently in existence, but
the replacement does have to represent a plant that could be built, as of the appraisal date,
using appraisal date technology. For example, in the late 1990s, a nuclear generating plant
in the U.S. would not have been replaced by another nuclear plant. It most likely would
have been replaced by a combined cycle gas turbine (CCGT) plant. A nuclear plant could
have been built but none were constructed because of the high cost of construction and the
risks of ownership. At that time, CCGT plants were inexpensive to build and very efficient
to operate because natural gas was an inexpensive fuel. Five to ten years later, natural gas
increased in price dramatically, new designs for nuclear plants reduced construction costs,
and the risks of owning a nuclear plant were considered controllable. The modern replace-
ment would not be a CCGT plant, but a nuclear plant. Technology and market perceptions
are constantly changing.
Costs such as depreciation expense, income taxes, insurance, and general and ad-
ministrative expenses typically are not considered in the analysis of excess operating costs,
as they are not directly indicative of the plant’s operation and may vary due to corporate
policies, practices, and the business’s financial health or status.
Economic obsolescence is another form of depreciation. It is caused by unfavorable
conditions external to the property, such as weakness in the local economy or the industry’s
economics, unavailability of financing, encroachment of objectionable enterprises, loss of
material and labor sources, lack of efficient transportation, shifting of business centers away
from the property, passage of adverse legislation, and undesirable changes in ordinances.
More specifically, economic obsolescence may be caused by reduced demand for
the product; overcapacity in the industry; dislocation of raw material supplies; increasing
157
costs of raw materials, labor, utilities, or transportation while the selling price remains
fixed or increases at a significantly lower rate; and new legislation that requires additional
investment for environmental considerations. Economic obsolescence results in a reduc-
tion in earnings.
It is significant to note that these manifestations may appear early in a plant’s life
and may occur despite the owner’s/operator’s previous operations and experience within
the industry. Except in unique circumstances, economic obsolescence is not curable be-
cause the forces that cause it are not under the influence or control of the subject plant.
Therefore, in most cases expenditures cannot cure the problem.
Another example of economic obsolescence is the result of operating restrictions
due to the enactment of regulations and the imposition and enforcement of pollution con-
trols. Added investment requirements or increased operating expenses, with no offsetting
sales or profit benefits, can result in a diminishment of value due to external economic
influences. The most extreme forms of economic obsolescence are the termination of an
entire plant or business enterprise due to insufficient profit or the “padlocking” of a plant by
a government regulatory agency for noncompliance with environmental mandates.
Curable Depreciation and Obsolescence
Curable forms of depreciation and functional obsolescence are those for which it
would be more economically prudent to cure the cause rather than endure the increased
operating expense penalties discussed previously. If the factors causing operating obso-
lescence can be cured at a lower cost than the operating obsolescence penalty, the correct
deduction is the cost to cure. The operating obsolescence penalty never can be greater than
the cost to cure. The cost approach then also involves a deduction and curable obsolescence
or depreciation.
A form of depreciation that may be considered curable economic obsolescence and
requires a deduction in the cost approach, if appropriate, is the deduction represented as
what a buyer or seller would need to spend to keep the plant operating into the future. Such
expenditures typically are mandated by the government. Necessary capital expenditures
normally only allow the plant to remain in operation; they do not increase profitability. In
most cases, they actually increase operating expenses. Some examples include meeting
environmental regulations for air and water emissions and removal of sulfur from gasoline
and diesel fuels.
Cost Approach Summary
The current cost of the process plant minus all forms of depreciation results in the
cost approach indication of value for the improvements. It is not uncommon for several
different forms of functional or economic obsolescence to be inherent in an operating plant.
Whether the penalty is functional or economic in nature, or even a blend of both, is not
always clear. Care must be taken to identify and quantify all forms of functional and eco-
nomic obsolescence without double counting. To have a meaningful cost approach value
indication all forms of depreciation and obsolescence must be thoroughly quantified.
The value of the land is then added to the cost approach indication of value for the
improvements. Using the sales comparison approach, a real estate appraiser values the land
158
as if vacant and available for development to its highest and best use, minus any known and
budgeted-for environmental cleanup costs (related to soil and water).
The following formula summarizes all elements of the cost approach:
Reproduction cost new

Minus functional obsolescence due to excess capital costs (technological advancements)
Replacement cost new
Minus physical deterioration
Subtotal
Minus functional obsolescence due to excess operating expenses (operating obsolescence)
Subtotal
Minus economic obsolescence (industry-based and plant-specific)
Cost approach indication of value of personal property improvements
Plus land value (and any other real estate)
Equals an indication of value by the cost approach
The cost approach can be a useful indicator of value for process plants only when
based on a new modern replacement plant analysis and when all forms of depreciation and
obsolescence have been thoroughly investigated and quantified. Under this approach, the
maximum value of a property to a knowledgeable buyer is that amount currently required
to erect or construct a new plant of equal utility.
Cost Approach Application

In the example used in the preceding discussions of the sales comparison and in-
come approaches, the subject property is not new, and consequently the current cost new
must be reduced to reflect physical deterioration, functional obsolescence, and economic
obsolescence attributable to the property as of the appraisal date.
The first task in applying the cost approach to value the example process plant is to
develop the plant’s current cost new. If the subject plant’s property record or asset ledger
represents the historical cost of the investments in the plant, the vintage investments can
be trended to develop the reproduction cost new of the improvements. The reproduction
cost new then can be sorted into categories to reflect the current costs of the individual
process units assigning (battery limits) and supporting units (off-sites). This level of detail
can be very useful in a value to each asset, group of assets, or pollution control asset, as
necessary. The battery limits process units may include the primary process units utilized
to manufacture the final products. Typical off-sites include buildings, land improvements,
utilities, blending, tankage, interconnecting piping, maintenance equipment, vehicles, of-
fice furniture, fixtures and equipment, control systems, computers, docks, shipping racks,
flares, and other assets necessary to operate the plant. Trending the vintage investments of
the personal property portion of the historical data only and excluding all real property in
the example plant results in a reproduction cost new, as of the appraisal date, of $6 billion.
The reproduction cost new reflects the trended investments in the assets actually lo-
cated at the subject plant (which also will include any inaccuracies in the plant records) and
also inefficiencies inherent in the plant’s current design and layout. The replacement cost
new, on the other hand, represents the cost of building a modern plant, with similar capac-
ity and utility, as of the appraisal date. If a modern plant were to be built as of the appraisal
159
date, its design and layout would be more efficient than the subject plants, its process units
and off-sites would incorporate modern technology, and it most likely would be much more
efficient overall. Any inherent problems with piecemeal construction, multiple like assets,
and inefficient equipment would be eliminated in the modern plant design.
The replacement cost new is developed using either published cost data or data
obtained from an engineering firm in the business of designing and constructing similar
plants. The assistance of a real estate appraiser may be required to estimate the cost of
the land improvements and buildings. If the records used to calculate the reproduction
cost new were reasonable, the reproduction cost new would most likely be similar to the
replacement cost new.1 Typically the replacement cost new is expected to be slightly lower
than the reproduction cost new. In this example, it is $5.6 billion.
To calculate functional obsolescence due to excess capital costs, the replacement
cost new is deducted from the reproduction cost new. For the subject plant, this functional
obsolescence is $400 million ($6 billion − $5.6 billion), which represents excess costs for
inefficiencies inherent in the subject plant’s current design, technology, and layout, which
would not exist in a new modern plant. Depending on the procedures utilized to calcu-
late the reproduction cost new and the technology available to replace the process plant,
functional obsolescence due to excess capital costs could be either positive or negative.
Sometimes new technology costs more, but if it is significantly more efficient than the old
technology it is replacing; it is a betterment. A prudent investor would be willing to build
a more expensive plant in order to decrease the annual cost of operation. Improvements
that typically reduce operating expenses include a smaller workforce because of fewer
operating units and increased automation, decreased energy requirements, reduced scrap
or waste, and an improved or increased product yield. However, since the purpose of the
appraisal is to value the subject plant, any betterment must be removed from the calcula-
tions as discussed later.
The first deduction from the current cost of construction is for physical deterioration.
Physical deterioration frequently is based on information obtained during site inspections,
discussions with plant management and engineering personnel, and an age/life analysis of
the entire plant or the individual process units and off-sites.
The site inspection provides information concerning general maintenance and
housekeeping at the plant. Many units at a process plant are under pressure or vacuum
conditions, operate at high temperatures, or rotate at high speeds. Heavy insulation or fresh
paint may prevent the units’ actual structural components from being observed. Discuss-
ing the maintenance practices, reviewing maintenance records, and calculating the age/life
deterioration can lead the appraiser to a meaningful opinion of the subject plant’s physical
deterioration.
The age/life analysis is based on the effective age of the investments and the physi-
cal life expectancies of the process units and off-sites. The sorting of the reproduction cost
new into appropriate groupings, as shown in Table 6.2, is useful in the physical deteriora-
tion analysis because it can provide meaningful information on effective age. The age/life
analysis should be utilized along with other information obtained during the site inspection
160
to develop the physical deterioration inherent in the subject plant. A simple example of the
physical deterioration analysis follows in Table 6.2.
Column Column Column #4 Column #5 Column #6

#2 #3 (2 ÷ 3) Concluded (1 × 5)
Column #1 Effective Physical Age/Life Physical Physical
Replacement Age Life Deterioration Deterioration Deterioration
Cost New (Years) (Years) (%) (Rounded) (%) Weighting
Battery Limits:
Process Line 1 $2,000,000,000 25 35 71 60 $1,200,000,000
Process Line 2 $1,000,000,000 13 35 37 40 $400,000,000
Environmental $500,000,000 10 20 50 50 $250,000,000
Sulfur Recovery $100,000,000 15 25 60 60 $60,000,000
Off-Sites:
Process Piping $900,000,000 18 50 36 40 $360,000,000
Electrical $800,000,000 18 40 45 55 $440,000,000
Water Treatment $200,000,000 5 35 14 15 $30,000,000
Maintenance
Equipment $100,000,000 16 30 53 55 $55,000,000
Total $5,600,000,000 50 $2,795,000,000
Table 6.2. Age/Life Analysis
Once the percentage of physical deterioration inherent in each major battery limits
process unit and off-site is developed, it can be applied to the cost as a line item to cal-
culate the physical deterioration weighting, reflected in column #6 in Table 6.2. The total
of these weighting amounts is then divided by the sum of the cost as of the appraisal date
to result in the weighted physical deterioration percentage. In this example, the physical
deterioration was quantified at 49.911% ($2.795 billion ÷ $5.6 billion). The derived factor
of 50% (rounded) is applied to the $5.6 billion, giving a replacement cost new less physical
deterioration amount of $2.8 billion ($5.6 billion × 50%). In this example, the weighting
was based on the replacement cost new. It also would be appropriate to utilize reproduction
cost new.
The next element of the cost approach to be investigated is functional obsolescence
due to excess operating expenses or operating obsolescence. Operating obsolescence is
quantified by comparing the operating expenses and yield of the subject plant with those
of a new modern plant. A new modern plant usually has a smaller workforce, reduced
energy requirements (natural gas and electricity), and increased yields. Performance data
for the subject plant typically can be obtained from on-site sources or benchmarking stud-
ies. Performance data for a new modern plant can be obtained from published sources,
benchmarking studies, engineering firms, or on-site or corporate engineering. In this ex-
ample, the annual excess operating expense penalty that the subject must endure over its
remaining life is $50 million.
Operating obsolescence is developed by calculating the after-tax present value of
this annual penalty over its remaining life. The penalty is tax affected because it increases
the plant’s operating expenses and therefore reduces its income tax liability. This tax re-
161
duction is a benefit to the plant that is reflected by tax affecting the annual penalty. The
appropriate tax rate would be the composite local and national (state and federal) tax rate
(e.g., 38.2% in this example). (This percentage is explained later in the income approach
section of this chapter.)
The discount rate to determine present value is developed using the procedures
discussed for the income approach in Chapter 5. However, this discount rate would be
lower than the rate used in the income approach because the penalty to be discounted is less
risky than the projected cash flows to be discounted in the DCF method. For this example,
12% is used. The discount rate also is adjusted for the anticipated growth rate of the annual
penalty. The growth rate is developed based on the appraiser’s analysis of how the annual
penalty would change (grow or decline) over time. In this example, it was determined that
the penalty would grow at an annual rate of 2% based on the projected growth rate of labor
and energy expense. The resultant adjusted discount rate is then calculated by 12% − 2%,
or 10%.
The present value factor to be applied to the annual penalty is calculated as de-
scribed in Chapter 5. With inputs of 20 years for the remaining life of the penalty and 10%
for the adjusted discount rate, the present value factor is computed as follows:
 
 1   1 =
 − 8.514 rounded to three decimal places
 ( 20
)
 10%   [1 + 10] x10% 

Using this factor, operating obsolescence as the present value of the after-tax an-
nual penalty is calculated to be $263,083,000 as follows:
8.514 × $50,000,000 × (1 − 38.2%) = $263,082,600 rounded to $263,083,000
In developing the annual excess operating expense penalty and the resultant operat-
ing obsolescence, the appraiser also must determine (when possible) whether any of the
penalties are economically curable. If any portion of the penalty is economically curable,
the cost to cure must be deducted before deductions for incurable obsolescence. If not,
the penalty should be deducted as operating obsolescence. Typically, the process plant’s
functional obsolescence problems are inherent in the design of the plant, and as such are
not economically curable. However, this must be confirmed. Both deductions may be de-
veloped, but only the lower of the two may be applied.
The next element of the cost approach to be investigated is economic obsoles-
cence. Economic obsolescence is reflected in a loss or reduction in earnings. Economic
obsolescence may be caused by outside influences such as government regulations, but
as discussed earlier, typically earnings are reduced because of competition or a supply
of products that is greater than market demand. The subject process plant’s product mix
includes various types of marketable commodity products. The primary raw material also
is a commodity. The value of the products produced minus the cost of raw materials is the
gross margin. Deducting the fixed and variable operating expenses from the gross margin
results in the net margin (prior to depreciation). Various publications and Internet sites
162
provide meaningful indications of gross margins and net margins over time. This type of
analysis can be a useful tool to quantify industry earning trends that can be utilized to cal-
culate economic obsolescence. Other useful factors that can be reviewed include inutility,
supply/demand imbalances, the value shortfall between the cost of a new modern plant and
its value based on an income approach, and the sale price of a plant compared to its current
cost new, among others discussed in as part of Chapter 3 (Cost Approach), Chapter 4 (Sales
Comparison Approach), and Chapter 5 (Income Approach). This type of economic obso-
lescence typically is not curable because it is industry-based and not site-specific. For the
purposes of this example, economic obsolescence has been quantified to be $280 million.
An investigation also must be made to determine if any environmental expenditures
are being forced upon the plant by a government entity. During the 1990s, process plants
in the United States were forced to invest hundreds of millions of dollars for environmen-
tal reasons. The capital expenditures mandated by these requirements precipitated large
investments in new equipment and increases in plant operating expenses. These can be
considered a form of possibly curable economic obsolescence specific to the subject plant
due to necessary capital expenditures. The plant must choose between making the invest-
ment or shutting down operations. In this example, the plant has been assumed to require
an investment of $350 million during the next few years to remove additional sulfur from
its products and increase its hydrogen-generating capacity, sulfur-recovery units, and as-
sociated off-sites. The present value of this expenditure pattern, as of the appraisal date, is
calculated to be $200 million. This type of economic obsolescence is curable because it is
site-specific.
The cost approach indication of value of the improvements, after deducting all
forms of depreciation from the current cost, is $2,066,917,000.
The market value of the land, developed (by a real estate appraiser) based on a sales
comparison approach, is $10 million. Deductions for any environmental issues associated
with groundwater have already been reflected in the land value.
Adding the market value of the land to the cost approach indication of value of
the improvements results in an overall cost approach value indication of $2,067,343,000
($2,066,917,000 + $10,000,000), reflected in Table 6.3.
163
Reproduction cost new (trended vintage personal property portion of

the historical data) investiments only $6,000,000,000
Minus functional obsolescence due to excess capital costs -400,000,000
Replacement cost new-See Table 6.2 5,600,000,000
Minus physical deterioration at 50% -2,800,000,000
Subtotal 2,800,000,000
Minus funtional obsolescence due to excess operating expenses -263,083,000
Subtotal 2,536,917,000
Minus economic obsolescenece based on the industry -200,000,000
Subtotal 2,336,917,000
Minus economic obsolescence due to necessary capital expenditures -280,000,000
Subtotal 2,056,917,000
Cost approach indication of value for improvements of personal
property 2,056,917,000
Plus land value +10,000,000
Cost approach indication of value $2,066,917,000
Rounded to $2,070,000,000
Table 6.3. The Cost Approach Indication of Value
Table 6.3 shows both forms of functional obsolescence: excess capital costs and
excess operating expenses. The excess capital cost penalty is due to changes in the cost of
constructing a new modern replacement facility instead of reproducing the older, existing
obsolete facility. A prospective buyer of a facility would not be interested in the cost of
building what is actually there, but would be interested in the cost of building a new modern
plant. Table 6.3 also reflects the reproduction cost new—slightly higher than the replace-
ment cost new. It is possible that the cost of a new plant, using current technology, could
be higher than the cost of the old plant, but the operating expenses would be substantially
lower, making the new, costlier plant more desirable. It also is possible that, even when
the replacement cost new is lower than the reproduction cost new, the operating expenses
of the old, obsolete plant are lower. This would result in an indication of functional obso-
lescence due to excess operating expenses that is negative. This tends to occur when the
technology reflected by the replacement cost is dramatically different (with dramatically
different operating expenses) from the actual plant being appraised. One example would be
replacing a nuclear plant with a CCGT plant.
Functional obsolescence due to excess operating expenses is simply the difference
in operating expenses between the existing (old, obsolete) plant and the (new, modern)
replacement plant. This is considered operating obsolescence, because using a more mod-
ern plant design reduces the fixed and variable expenses of operating the plant. If any of
the penalties associated with operating obsolescence are economically curable, and can be
cured at a cost lower than the penalty, then the correct deduction in the cost approach is cur-
able obsolescence. Most process plants have inherited operating penalties because of years
of piecemeal construction, as well as changes in technology and energy efficiencies over
164
time. Thus, the functional obsolescence penalty is incurable and will continue throughout
the life of the plant.
Necessary capital expenditures are a penalty against the plant, primarily caused
by changes in safety and/or environmental laws. The plant has two choices: comply with
the government mandate or shut down. Because an outside force requires a change in the
plant’s design, the penalty is considered a form of possibly-curable economic obsolescence.
The cost approach can be a useful indicator of value for process plants only when
based on a new modern replacement plant cost and operating characteristics, and all forms
of depreciation are deducted.
Indication of Value by the Cost Approach = $2,070,000,000

As discussed in Chapter 4, the sales comparison approach develops value through
an analysis of recent sales of comparable property. An indication of value is derived by
reviewing the sale prices of properties similar to the subject that have sold in the market.
Comparable sale data must be drawn from actual transactions (or current offerings) in-
volving similar property. The comparables’ prices are adjusted to reflect factors such as
differences in size or capacity, magnitude of processing, market conditions or time, age,
and location, between the subject plant and the market comparables. As discussed, the ap-
praiser must be cognizant of the assets included in the transaction as a typical transaction
may include not only the real and personal property tangible assets associated with the
process plant, but also intangible assets, working capital, and other assets.
An active market may or may not exist. A single isolated sale of a similar plant may
not be representative of the value of the subject plant or the price it would bring if offered
for sale in the market. One transaction, the economic decision of one market participant,
can represent an abnormality that may not reflect the market. An analysis of only one simi-
lar property sale can be likened to a very “thin” market, in terms of securities, with very
few trades being made. The market concept refers to the fact that the comparable sales used
in the sales comparison approach should reflect arm’s-length transactions between willing
buyers and willing sellers, not transactions in which compulsion on the part of either party
influenced the amount paid. For a sale to be considered comparable, the plant must be
similar to the subject in physical attributes, such as capacity and design, and have similar
income levels and patterns. For the market in which the sale took place to be considered
comparable, it must show the same demand for that type of property or the product it
produces. The comparables must be similar enough to allow for legitimate and meaningful
adjustments. If the differences between the subject and the comparables are too extreme
and are not properly reflected in the adjustment grid, the sales comparison approach will
not be meaningful.
The strengths of the sales comparison approach, as it applies to process plants,
include the fact that it represents the best evidence when strong comparable transactions—
those that are not only similar to the subject but also easily explained and understood—are
available. The weakness of this approach lies in the difficulty often experienced in find-
ing appropriate comparable sales and discovering the motives of buyers and sellers. In
general, this approach is less appropriate for certain transactions because of the number
and magnitude of adjustments that must be made to any suggested comparable transac-
165
tion in order to determine market value on a comparable basis for valuation purposes, as
opposed to the investment value or value to a particular owner evidenced in the purchase
price. For example, adjustments may be necessary to extract the value of a single plant
from a multiple-plant transaction, to adjust for different financing conditions, to extract the
value of intangible elements included in the sale, or to account for the presence or absence
of contracts and agreements, as well as for dissimilar raw material sources and physical
condition.
Table 6.4 contains an adjustment grid for the hypothetical process plant in this
example. Adjustments are shown for capacity, processing slate of products, effective age,
time, and location.
Subject Sale 1 Sale 2 Sale 3

Transaction Price N/A $1,920,000 $870,000,000 $6,060,000,000
200,000 200,000 100,000 400,000
Capacity Adjustment
1.000 2.000 0.500
Slate-of-Products 10 8 10 12
Adjustment2 1.250 1.000 0.833
Effective Age 25 years 20 years 25 years 20 years
Adjustment 0.857 1.000 0.857
Appraisal date Concurrent 1 year prior 3 years prior
Time Adjustment
1.000 1.050 1.150
Houston, Texas U.S. Gulf Coast U.S. East Coast U.S. West Coast
Location Adjustment
1.000 1.100 0.800
Composite Adjustment 1.071 2.310 0.328
Adjusted Price $2,056,320,000 $2,009,700,000 $1,987,680,000
Rounded to nearest
$2,060,000,000 $2,010,000,000 $1,990,000,000
$10,000,000
Table 6.4. Adjustments for the Sales Comparison Approach3
Each of the three comparable sale transaction prices is adjusted to equate to the
subject based on capacity (size), slate of products (the magnitude of processing the plant is
capable of performing), effective age (indication of the physical condition of the process
plant), time (market conditions), and location (profitability of the location or market).
The capacity and slate of products adjustments for this example have been derived
based on a direct ratio comparing the sale with the subject. Looking at the capacity of each
of the comparable sales, we can see that comparable sale #1 has a capacity of 200,000 units,
the same as the subject, so no adjustment is required for comparable sale #1. However,
comparable sale #3 is shown to be 100,000 units while comparable sale #4 has 400,000.
On a direct ratio basis, these can be shown as follows:
For comparable sale #2
Subject = 200,000
= Factor of 2, reflecting the larger capacity of the subject
Sale #2 = 100,000
166
For comparable sale #3

Subject = 200,000
= Factor of 0.5, reflecting the larger capacity of sale #3
Sale #3 = 400,000
The subject’s slate of products and the comparable sales also has been calculated on
a ratio basis similar to the process used here for the capacity adjustment. The calculation
for the slate of products adjustment is shown as follows:
Subject=10
= Factor of 1.25, reflecting the greater capability of the subject
Sale #1=8
Subject = 10
= Factor of 0.833, reflecting the smaller capability of sale #3
Sale #3
Since comparable sale #2 has the same slate of products as the subject, no further
adjustment is required.
Since the comparable sales are of properties that are not new, an adjustment is
required that is slightly different from that explained in Chapter 3 (Cost Approach).
To calculate the effective age (EA) adjustment, the age difference between the com-
parable sale and the subject is divided by average physical life or normal useful life (NUL)
expectancy, and the resulting ratio is subtracted from 1. The formula is as follows:
1 − ( subject EA − comparable sale EA ) ÷ average physical life 
For example, when sold, comparable sales #1 and #3 had an EA of 20 years and
the EA of the subject as of the appraisal date was 25 years. The difference is 5 years (25
years − 20 years). The average physical life of all assets at the subject process plant is about
35 years. Therefore, the calculation is as follows:
1 − ( 25 years-20 years ) ÷ 35 years  =

0.857
Because the subject was 5 years older than comparable sale #3, the adjustment
is downward. The comparable sale is superior to the subject. Effective age provides in-
dications of not only the physical condition of the process plant assets, but also the level
of technology inherent in the comparable transactions in comparison with the subject. A
lower EA generally reflects better physical condition (more recent investments) and more
technological upgrades.
The time, or market conditions, adjustment is based on the profitability of the time
period when comparable sale #3 took place in comparison with the appraisal date. It may
be measured based on margins or other indications of profitability from one point in time to
another. For this example, it has not been measured based on general inflation or local real
estate market conditions, but instead on local, regional, or national industry market condi-
167
tions. In Table 6.4, the time adjustment has been measured based on margins as opposed
to calendar years, as described in Chapter 4 (Sales Comparison) as being a more indicative
adjustment for the subject situation.4 Comparable sale #3 occurred three years prior to the
appraisal date and warrants a time adjustment of 1.150, a 15%–upward adjustment. This
indicates that, as of the appraisal date, the market, or profitability, was 15% better than
when comparable sale #3 took place. Comparable sale #3 is inferior to the subject regard-
ing time, or market conditions.5
The last adjustment considered is for location. Different locations realize different
levels of profitability. For the location adjustment, like the time adjustment, profitability
may be measured using margins, but instead of comparing margins at different time pe-
riods, the location adjustment compares margins at different locations, as of the appraisal
date. Comparable sale #3 was located on the West Coast of the United States and the
subject is located in Houston, Texas. The West Coast historically has experienced higher
margins than the Houston area; thus a downward adjustment is required. Comparable sale
#3 warrants a location adjustment of 0.800, a 20%-downward adjustment, indicating that
comparable sale #3 is superior to the subject in that it has a more profitable location.
The composite adjustment factor is the result of multiplying the capacity, slate of
products, effective age, time, and location adjustment factors. The composite adjustment
factor for comparable sale #3 is
0.328 = 0.500 x 0.833 x 0.857 x 1.150 x 0.800.6
This indicates that comparable sale #3 is superior overall to the subject and requires
a significant downward adjustment.7
In this analysis, we are able to use objective data to calculate a multiplicative ad-
justment factor for each of the adjustment criteria. The composite adjustment factor can be
calculated as each multiplicative adjustment factor is derived. Another possible adjustment
analysis entails deriving a positive or negative percentage adjustment factor for each of the
adjustment criteria. The percentage adjustment factors are added together; the sum is the
composite adjustment, which is then applied to the comparable’s transaction price. So, how
adjustment factors are applied depends on the manner in which they were derived.
In this example, the composite adjustment factors for all three sales range from
0.328 to 2.310, resulting in rounded value indications for the subject process plant of $1.99
billion to $2.06 billion, a relatively narrow range of approximately 5%, given the magni-
tude of the total indication of value. In practice, the range may be much wider. Because
process plants are very complex operating businesses, it may be difficult to adequately
adjust their transaction prices to reflect the subject plant’s characteristics. Even when the
proper adjustments are significant, the sales comparison approach should not be ignored.
If nothing else, the adjusted prices of the comparable sales will bracket the value (exhibit
minimum and maximum values) of the subject property. The range, mean, and median
adjusted sale prices frequently are calculated during the analysis, but the final indication
of value by the sales comparison approach should be based on the most similar and most
meaningful transactions, those with the least significant adjustments.
There may be instances where, due to the difficulty in obtaining all of the facts of a
transaction, as well as the magnitude of adjustments necessary to convert each transaction
into an indication of value for the subject, the sales comparison approach may not provide
168
an obvious indication of value. Still, it can be used at least to provide a range of value. The
sales comparison approach is the only analysis that clearly reflects the actions of buyers
and sellers.
Indication of Value by the Sales Comparison Approach = $1,990,000,000–2,060,000,0008
Income Approach
As discussed in Chapter 5, the income approach measures the present value of
monetary benefits anticipated to be derived in the future from asset ownership. These mon-
etary benefits are based on the income stream expected to be available to the assets’ owner.
The present value of the future monetary benefits is measured by taking into account the
duration and pattern of the projected income stream and the risk inherent in realizing that
income stream. The duration and pattern of the projected income streams are based on
projections that take into consideration the type of property, its remaining economic life,
and future market conditions. The risk element is recognized by discounting the projected
income stream at a discount rate commensurate with the risk perceived by a prospective
investor in the subject plant compared with other investment opportunities. The discount
rate is based on the risk inherent in the investment, not the investor.
The income approach is the primary method buyers and sellers use to make an
investment decision. However, buyers and sellers do not develop an income approach in-
dication of value and then decide to participate based on only that one indication. Buyers
in particular develop a matrix of income approach indications using different discount
and capitalization rates, product and raw material prices, operating expense projections,
income and property tax forecasts, and capital expenditure budgets. The matrix of indica-
tions then is analyzed, and the most likely scenarios are used to negotiate a purchase price
in a competitive market.
In most appraisals, the income approach to value is developed assuming the subject
property is used to produce marketable products to be sold in the competitive market at
market rates (the merchant plant income approach). As an economic analysis, this approach
inherently includes all assets necessary to operate the facility: land, land improvements,
buildings, process units or machinery and equipment, support items (off-sites), working
capital, and intangible assets. The income approach is a meaningful tool in determining
the value of an operating plant because it allows the appraiser to mirror the investment
decisions of buyers in the market.
The income approach is established on the theory that a knowledgeable investor
will base an investment decision on the expected returns (cash flows) generated by a prop-
erty or business. The value of the property or business will be developed based on the
returns generated, the period of time over which they will be generated, and the risks in
actually receiving the returns.
In an appraisal, estimates are made of the gross revenue that might be expected
from rental of the asset and of the expenses that might be incurred by the owner. The result-
ing net operating income (gross revenue minus expenses) is capitalized at an appropriate
rate to indicate the value of the asset as an investment. This capitalization rate represents
the relationship between earnings and value, and is a composite of the cost of debt service
169
and the net cash flow requirements of the typical equity investor; the rate considers risk,
availability of financing, and current market conditions.
The capitalization rate varies based on the level of earnings to be capitalized. An
after-tax level of earnings requires a lower capitalization rate than does a pretax level of
earnings, because more expenses have been removed. Mathematically, the deduction of
income taxes means that the income amount to be capitalized is smaller. The appropriate
capitalization rate also must be lower to develop the appropriate value indication. If the
level of income is pretax, income taxes have not been deducted, so the income amount is
larger, and conversely, for the capitalization rate to derive the appropriate value indication,
it must be higher. For example, assuming the correct value is $10,000, if after-tax income
is $1,000, the capitalization rate (again, the ratio of income to value) would be 10% ($1,000
÷ $10,000). However, if pretax income is $1,500, the capitalization rate would be 15%
($1,500 ÷ $10,000). The capitalization rate applied must correspond to the level of income
to be capitalized.
An operating process plant is a single-user manufacturing facility that includes not
only the tangible items of real estate and machinery and equipment, but also the intangible
assets and working capital that in aggregate represent an operating business. This type of
property typically is not leased; therefore, the income approach cannot be developed based
on rental rates. Developing the income approach for an operating process plant entails the
determination of future revenues and associated expenses, capital requirements, and work-
ing capital needs necessary to generate and support the anticipated revenue stream.
Business enterprise value, as defined in the Glossary, is all tangible assets (prop-
erty, plant, equipment, and working capital) and intangible assets of an operating business.
It represents the value of the total invested capital of the business, composed of long-term
debt and stockholders’ equity. The debt holders and equity owners (or stockholders) own
the operating plant. The combination of their investments in the plant (purchasing the real
estate and machinery and equipment, providing working capital, and paying for the devel-
opment of the intangibles) makes the business a going concern and is represented by the
business enterprise value.
The income approach may be used to determine the business enterprise value of
an operating business through the application of a discounted cash flow analysis. This
technique measures the direct economic benefits derived from ownership in the form of
cash inflows and outflows attributed to the property, stated at their present value. Cash
inflows are the income resulting from sales of manufactured products. Manufactured prod-
ucts include gasoline and diesel fuels, automobile and truck tires, various types of plastics,
gypsum, cement, and any other marketable products manufactured from lower-value raw
materials. Cash outflows include the cost of acquiring raw materials (possibly multiple
types), operating expenses (specifically, labor expenses, labor overhead, plant insurance,
supplies, maintenance, consulting fees, catalysts and chemicals, and any other expense
necessary to operate and maintain the plant), property and income taxes, future capital
expenditures, and any infusions to working capital necessary to support growth and sales
revenue.
Future capital expenditures (CAPEX) or reserves for replacement also are con-
sidered cash outflows that are necessary to support or maintain current operations. They
normally do not include any expenditures that materially alter existing facilities or cur-
170
rent operations, except those required by government regulations. There are primarily two
types of future capital expenditures, those that are used to replace old worn-out assets, and
those that are required by a government regulation, primarily for safety and environmental
improvements. The annual replacement costs of old worn-out assets normally are in the
magnitude of the inverse of the total physical life of all property at the plant. For example,
if the physical life was in the range of 30–50 years, the capital expenditures might be 2%
(1/50) to 3% (1/30) of the cost of reproduction new. This percentage would be greater
for shorter-lived property and lower for longer-lived property. Near-term capital expendi-
tures budgets typically are obtained from the operator of the plant being appraised. Only
a few years of most capital expenditures budgets are meaningful because plant manage-
ment places most emphasis on a budget window. Caution must be utilized when projecting
capital expenditures; if some is already in the operating expenses as a maintenance cost,
the calculated projection would need to be adjusted downward. Including new investments
or assets that change the plant’s design in the capital expenditures projection may require
adjustments in the revenue and raw material projections, and in operating expenses and
future capital expenditures. Environmental capital expenditures also frequently increases
operating expenses, as it involves new equipment not reflected in existing operations.
The discounted cash flow (DCF) analysis of the income approach may be developed
on an after-tax or pretax debt-free net cash flow basis. Debt-free means that interest and
the repayment of debt principal are not included in the analysis. This eliminates the effects
of how the actual business is currently being financed and taxed, and most importantly,
recognizes the future cash outflows that are necessary to achieve the projected cash flows.
The conventional discount rate, discussed in Chapter 5, is designed to be applied to an
after-tax debt-free level of earnings. If the discounted cash flow analysis was developed on
a pretax debt-free cash flow basis, the discount rate would have to be adjusted to reflect the
higher level of earnings. This is typically done by dividing the after-tax discount rate by 1
minus the composite tax rate.
The discounted cash flow (DCF) analysis for an operating plant results in an indica-
tion of the value of the business enterprise associated with the going concern. Following
is an example of a discounted cash flow analysis for a process plant. The primary inputs to
the income approach are discussed below.
Throughput
The throughput at a process plant includes the primary raw materials and
any blendstocks and intermediate materials put into the process, and reflects
the capacity of the subject plant and the demand of the market in which it
competes. Continuing the example introduced for the sales comparison ap-
proach, the subject process plant, which has a capacity of 200,000 units per
day, is projected to run at 80% utilization, or 160,000 units per day. In ad-
dition to the primary raw material, the plant will purchase 20,000 units per
day of blendstocks and 30,000 units per day of intermediates for a total of
210,000 units per day. Considering that most process plants are designed to
operate 24 hours per day, seven days per week, the total annual throughput
is projected to be 76,650,000 units per year (210,000 units/day × 365 days/
year).
171
Revenues
Revenues from the operations include the gross sales receipts from the
products produced and intermediates. Revenues are projected based on the
quantity of products produced and their market prices over the projection
period. Market price projections may be obtained from the client or data
published by either the government or private consulting firms. The products
produced at process plants are typically commodities, the future prices of
which are based on supply, demand, and competition, not just inflation or
the national or local economy.
Cost of Raw Materials
Projections of the cost of raw materials, including the primary raw material,
blendstocks, and intermediates used in the manufacturing process, are
based on the quantities required to produce the projected revenues at market
prices. Market price projections may be obtained from the client or data
published by either the government or private consulting firms. Just like the
products produced, the raw materials utilized at process plants are typically
commodities, the future prices of which are based on supply, demand, and
competition, not just inflation or the national or local economy.
Gross Margin
The calculation to determine the gross margin in a process plant is revenues
minus the cost of raw materials. The gross margin primarily reflects market
conditions outside the plant’s control. This level of earnings, if declining,
may be an indicator of economic obsolescence.
Operating Expenses
Operating expenses include labor and labor overheads, maintenance,
chemicals and catalysts, corporate overhead, property taxes, own used fuel,
sales and marketing, administration, insurance, and utilities. Projections of
these expenses are based on a review of past operating results, corporate
forecasts, and published industry data, as appropriate.
Depreciation
Depreciation expense is calculated based on allowed income tax guideline
schedules for personal property (machinery and equipment) and real prop-
erty (land and buildings). The tax schedules used must be current as of the
appraisal date. The use of income tax guidelines implies that the property
was sold and the new owner will restate the assets at the sale price (or value
of the tangible assets in the DCF) and maximize the income tax protection
provided through the use of accelerated depreciation, as appropriate. The
calculation of depreciation is based on the result of the DCF analysis and
therefore usually requires a reiterative series of calculations using a com-
puterized spreadsheet analysis. In the valuation of a process plant, the use
of the current owner’s book or tax depreciation is inappropriate because it
reflects past cost-based investment decisions, not the investment decisions,
as of the appraisal date, by the prospective investor in the plant.
172
Total Operating Expenses

Total operating expenses represent the sum of operating expenses and
depreciation expense.
Operating Income
Operating income is determined by calculating the gross margin minus total
operating expenses.
Earnings Before Interest, Taxes, Depreciation, and Amortization
(EBITDA)
Depreciation expense is added back to operating income to yield EBITDA.
This is a useful level of income for the appraiser to identify because it
excludes the effects of interest expense and debt repayment, depreciation
expense, amortization, and the tax structure of the subject plant and its
owner company. Sometimes referred to as net margin in the process plant
and certain other industries, EBITDA frequently are used to compare
the subject plant with similar properties to verify the reasonableness
of historical operating results and/or projections. Potential buyers in the
market commonly apply market multipliers to EBITDA as a check on the
reasonableness of the DCF analysis.
Income Taxes
Income taxes are the process plant’s combined local, state, and federal
income taxes. Because local/state income taxes are frequently deductable
when calculating federal income taxes, the following formula is used to
calculate the composite tax rate:
1 (1 − Local/State Rate ) x (1 − Federal Rate ) 
Composite Tax Rate =−
For example, if the local/state rate is 5% and the federal rate is 35%, the
composite rate would be calculated as follows:
1 − (1 − 5% ) x (1 − 35% )  or 1 − [ 0.95 x0.65] =[1 − 0.618] =0.382 or 38.2%
Net Income
Net income is determined by calculating operating income minus income
taxes.
Adjustments to Net Income
The calculation of debt-free net cash flows (DFNCF) from operations equals
net income plus depreciation expense, minus future capital expenditures,
minus working capital changes. The debt-free net cash flows are the level of
income that matches the conventional after-tax discount rate.
Depreciation
The depreciation expense calculated previously is added to the net income,
because depreciation is a noncash expense item that reduces income tax
liability and represents the return of the investment. A noncash expense is
173
not an actual cash outflow from the plant. It is calculated only to develop a
pretax level of earnings, to which the composite income tax rate is applied
to calculate income taxes. For that reason, depreciation is added back to
calculate cash flow.
Future Capital Expenditures (CAPEX)
Next, future capital expenditures (CAPEX) are deducted. This deduction is
developed based on a review of actual budgeted capital requirements and
normal replacements to provide for safe and reliable long-term operations.
Over the long term, future CAPEX should be in line with the cost new of
the process plant divided by its physical life, minus any expenses already
deducted as an operating expense. For example, if the cost new of the plant
was $6 billion and its physical life is estimated to be 35 years, the future
CAPEX would be projected to be $6 billion divided by 35, or $171,428,571
(rounded to about $171 million) per year. Of course, some of this amount
already would have been deducted as an operating expense. But to keep the
plant operating in a safe and reliable manner, this level of investment would
be required on an annual basis. The future CAPEX deduction is sometimes
referred to as the reserve for replacement. CAPEX is a depreciable cost, and
therefore it must be included as a component of the depreciation expense.
Working Capital Changes
The next step is to deduct working capital changes, or the amount that the
business must invest in operating working capital (defined as current assets
minus current liabilities, net of the current portion of long-term debt). It
generally is calculated based on a percentage of revenue change. If rev-
enues are increasing, working capital additions will be positive; they will
be negative if revenues are decreasing. Working capital changes are derived
by reviewing the working capital needs of publicly traded companies in
the same industry, most likely the same companies utilized in the capital
structure analysis used in developing the discount rate.
Debt-Free Net Cash Flow (DFNCF)
The calculation of net income plus depreciation expense, minus future capi-
tal expenditures, plus (or minus) working capital changes, yields the after-
tax debt-free net cash flow (DFNCF). This is sometimes referred to as free
cash flow, or a property’s true operating cash flow. Debt-free net cash flow
is the total after-tax cash flow generated by the going concern and available
to the providers of the plant’s invested capital: stockholders (equity) and
creditors (debt).
If the DCF analysis is developed on a pretax basis, depreciation and income taxes
will not be reflected in the analysis. Therefore, the pretax debt-free net cash flow not only
will be available to the providers of the plant’s invested capital, but also must be utilized
to pay income taxes. In both pretax and after-tax analyses, interest expense and debt re-
174
payment are not included. The pretax discount rate is based on the after tax discount rate
adjusted for the effects of income tax, as presented in the following formula:
After Tax Discount Rate

Pretax Discount Rate =
(1 − Composite Income Tax Rate )
For example, if the after-tax discount rate was 10% and the income tax rate was
38.3%, the pretax discount rate would be calculated as follows:
10 10
= = 16.18 = 16.2% rounded
(1 − 0.382 ) 0.618
While this calculation to convert from after-tax to pretax is not precise, it is the
most direct and most commonly utilized procedure.
The DCF analysis presented here represents one form of the basic model used to
restate a plant’s actual historical operating statements and forecast the future. The duration
of the forecast period depends on the economics of the subject’s industry and the subject
plant, and the physical attributes of the subject plant. If the subject assets are physically
very old and obsolete, the remaining life of the plant may be very short. (It is possible to
spend large amounts of money to rebuild a plant, but it may not be economically prudent.)
The forecast period in such a case could be very short. In certain process industries, the
commodities produced and used as a raw material are very volatile and difficult to forecast.
For such industries, it is often better to project over, say, a five-year period, and then just
capitalize the cash flow of the last year in the DCF analysis (terminal or residual year).
When a property has a long remaining life, the DCF can be forecast over a period of
20 to 50 years, or even 100 years, but beyond 20 years or so, the present value of the debt-
free net cash flow is so minimal that it becomes moot. The point at which the changes in
cash flows begin to stabilize (generally after 10–15 years) is considered the terminal year,
whose projected cash flow is capitalized into perpetuity. The cash flow of the last forecast
year is calculated with depreciation equal to future capital expenditures to reflect continued
replacements of expired assets. Also, working capital changes are set to zero because the
forecast is now in constant dollars. A long forecast period is not necessarily more accurate
than a short forecast period. Because process plants operate in a commodity business,
projecting the future cannot be precise. It is not uncommon to utilize a short forecast period
to minimize the risks inherent in a long-term projection period. Again, the length of the
forecast period relies on the facts and circumstances of the plant and the industry in which
it participates.
Once the cash flows are projected over the forecast period and the appropriate dis-
count rate is developed, present value factors to be applied to the cash flows are calculated.
Typically, cash flows are received throughout the year; using a midterm present value fac-
tor calculated as
1
(1 − Discount Rate )
n
175
where n is the midyear period (i.e., n = 0.5 in Year 1 or 1.5 in Year 2) which simulates the
flow of the cash. For the terminal or residual period, the projected cash flow is capitalized
into perpetuity employing a constant growth model (discount rate minus the cash flow rate
of growth), and also reduced to present value employing the present value factor at the end
of the projection period. The indicated value of the plant as a viable operating entity into
the future is equal to the sum of the present values of the interim projections of cash flow
plus the terminal or residual value. Table 6.5 shows a DCF analysis for a typical process
plant.
Discounted Cash Flow Analysis
$000
Year 1 2 3 11 12
Annual Throughput 76,650,000 76,650,000 76,650,000 ===˃ 76,650,000 76,650,000
Revenues
Projected Price Per Unit 73.80 78.25 76.69 71.23 73.18
Annual Throughput x
Projected Price 5,657,000 5,998,000 5,878,000 5,460,000 5,609,000
Raw Materials
Projected Price Per Unit 63.60 66.99 65.94 62.79 64.10
Annual Throughput x
Projected Price 4,875,000 5,135,000 5,054,000 4,813,000 4,913,000
Gross Margin 782,000 863,000 824,000 ===˃ 647,000 696,000
Operating Expenses
Labor & Maintenance 102,000 104,000 106,000 124,000 127,000
Utilities 24,000 25,000 25,000 30,000 30,000
Materials and Services 23,000 24,000 25,000 29,000 30,000
Chemicals and Catalysts 13,000 13,000 13,000 16,000 16,000
Other Expenses 10,000 11,000 11,000 13,000 13,000
Corporate Overhead 23,000 24,000 24,000 22,000 22,000
Total 195,000 201,000 204,000 ===˃ 234,000 238,000
Depreciation 208,000 377,000 308,000 144,000 49,249

Total Operating Expenses 403,000 578,000 512,000 ===˃ 378,000 287,249
Operating Income 379,000 285,000 312,000 269,000 408,751

Net Margin (EBITDA) 587,000 662,000 620,000 ===˃ 413,000 458,000
Income Taxes 233,000 263,000 246,000 164,000 182,000

Net Income 146,000 22,000 66,000 105,000 226,751
Depreciation 208,000 377,000 308,000 144,000 49,249

Future Capital Expenditures 69,000 45,000 18,000 51,000 49,249
Working Capital Changes 0 17,000 -6,000 5,000 0
Debt Free Net Cash Flow
From Operations 285,000 337,000 362,000 ===˃ 193,000 226,751
176
Present Value Factor 0.9407 0.8325 0.7367 0.2771

Present Value 268,100 354,244 355,235 ===˃ 67,412
Discount Rate 13%

Cash Flow Growth
Projection 2.0%
Capitalization Rate 11.0%
FMV in Beginning of Year
12 2,061,373
Periods 11
Present Value Factor* 0.2658
Value as of the Appraisal
Date 547,913
Sum of PV of Cash Flows 1,970,773
PV of Year 12 Value
Indicator 547,913
Business Enterprise Value 2,518,686
Less Current Working
Capital 282,850
Less Intangible Asset Value 258,013
Tangible Asset Value 1,977,823
Rounded to Nearest
$10,000 1,980,000
*The present value factor represents the end of year 11 factor because the FMV reflects the end of year 11
or beginning of year 12 value.
Table 6.5. DCF Analysis for a Typical Process Plant
In Table 6.5, the depreciation expense is derived from the tangible asset value and
the federal government-provided depreciation schedules. Because depreciation schedules
change with the tax laws, the current schedules as of the appraisal date must be used.
The appropriate depreciation schedules also vary depending on the type of property being
valued and the industry classifications. In this example, a 39-year straight-line deprecia-
tion schedule was used for the buildings and a 10-year modified accelerated cost recovery
system (MACRS) schedule was used for the machinery and equipment. The tangible asset
value and the future capital expenditures are both depreciated because they represent new
assets for the acquiring party. Land is not included in the depreciation calculations because
it is not a depreciable or wasting asset.
The working capital changes represent additions or deductions in the operating
plant’s working capital needs. The amount is based on the working capital requirements
of the business (in this example, 5% of the revenues, or 5% × $5,657,000). As revenues
increase or decrease, the plant’s working capital needs change. For example, the difference
in revenues between Year 2 and Year 1 is $341,000 ($5,998,000 − $5,657,000). Because
the revenues increase, the working capital needs of the business increase; therefore, 5% of
177
$341,000, or $17,000, is deducted from the cash flow to be retained by the operating busi-
ness in Year 2. In Year 3, the revenues decline, so the working capital needs also decline,
which adds to the cash flow.
The resultant debt-free net cash flow from operations represents the cash available
to both the equity and debt holders of the operating plant.
The last column of the DCF analysis, Year 12 in the example in Table 6.5, exhibits
the projection of revenues and expenses to be capitalized into perpetuity. Depreciation
expense, based on a 39-year straight-line schedule for the buildings and 10-year MACRS
schedule for the machinery and equipment (representing most of the depreciable assets
in this example), also includes depreciation for CAPEX. Though most of the depreciable
assets reflective of the tangible asset value are fully depreciated by Year 12, the buildings
and CAPEX still are being depreciated; therefore, the level of depreciation in Year 12 is
appropriate for long-term operations. The Year 12 CAPEX is equal to the depreciation
expense, reflecting the future replacement of the existing assets. Because the revenues into
the future are in constant dollars, future working capital changes are zero.
Terminal value is an economic forecast which, when used, is usually highly quali-
fied as a projected value based upon certain facts at a point in time that may or may not
come to pass. In this example it is the present value of the fair market value in beginning
of Year 12, shown in Table 6.5. It is derived by adjusting the 13% discount rate for growth
in the cash flow into perpetuity. The 2% cash flow growth projection is the appraiser’s
forecast that reflects the growth of the cash flow over the long term. The growth forecast
can be negative or positive depending on plant-specific and industry-specific economic
fundamentals (supply, demand, and competition). The resultant capitalization rate of 11%
(13% − 2%) is divided into the Year 12 normalized (stabilized) cash flow projection. The
Year 12 cash flow reflects the appraiser’s forecast, at the beginning of Year 12 (or the end
of Year 11), of the cash to be capitalized. Because the fair market value in beginning of
Year 12 is a future value, it must be adjusted to present value as of the appraisal date. Using
an end-of-period present value technique, the terminal value is multiplied by the PV factor
(calculated as [1 ÷ (1 + i)n], where i is the 13% discount rate and n is 11 or the number of
periods representing the end of Year 11 or the beginning of Year 12) to result in the PV of
Year 12 value indicator. When the terminal value is added to the sum of PV of cash flows,
the result is the business enterprise value.
As noted in Chapter 5, a business enterprise has three components: working capital,
tangible assets, and intangible assets. In the sample DCF analysis presented, the appropri-
ate working capital is concluded to be 5% of revenues, based on the guideline companies
analyzed in the development of the discount rate. Working capital equals current assets
minus current liabilities, not just the value of inventory.
Intangible assets always exist in an operating plant; without them, the plant would
not be operating. A process plant’s intangible assets include the assembled and trained
management team and workforce, engineering drawings, patents, contracts and agree-
ments, emission allowance, software, and the time-economic benefit of a going concern.
The value ascribed to the intangible assets must be based on either an appraisal of the
specific intangible assets associated with the subject plant’s business or experience from
prior valuations of the same intangible assets of similar process plants.
178
Deducting the working capital and intangible asset values from the business en-
terprise value results in the value of the tangible assets, i.e., all real and personal property.
The income approach reflects actual investor expectations for the plant’s market
and includes an investigation of economic conditions and future projections of a long-term
stabilized income stream. The discount rate is based on market indicators and prices for
equity investments and debt instruments. The income approach is the primary indicator
of value used by investors when making an investment decision, but the income approach
alone does not make an appraisal as all three indicators of value always should be inves-
tigated. Slight variations in the inputs of a DCF can influence greatly the resultant value.
Indication of Value by the Income Approach = $1,980,000,000
Conclusion: Reconciling the Three Approaches to Value for a Process

Plant
To develop a complete and credible appraisal of a process plant, an appraiser must
fully develop and then correlate all three approaches to value—sales comparison, income,
and cost.
Each of the three indicators of value reflects the market. The market is defined by
the actions of buyers and sellers, projections of product prices, raw material costs, operat-
ing expenses, future capital investments, the required returns of equity investors, the cost
of debt, an industry capital structure, the cost of new modern construction, all forms of
depreciation and obsolescence, and industry economics. When fully developed, the three
approaches to value combine to reflect all attributes of the market. The most supportable
appraisal, accordingly, involves all three indicators of value, the results of which are cor-
related to a final value conclusion based on the appraiser’s judgment of the reliance to be
placed on each of the calculated value indications.
For the hypothetical process plant valuation discussed in this chapter, all attributes
of the market were investigated, reviewed, and analyzed to develop the three approaches
to value.
Ideally, all three approaches would support the same value conclusion, or at least
define a narrow range. The three approaches to value as used herein resulted in the follow-
ing indications of value:
Cost approach $2,070,000,000
Sales comparison approach $1,990,000,000 to $-2,060,000,000
Income approach $1,980,000,000
In this example, the three indicators resulted in a narrow value range that may lead
the appraiser to conclude a value between $1.98 billion and $2.07 billion (a 5% difference).
It is possible to develop value indications in a narrow range as shown in this example. In
practice, though, the range may be broader because of the lack of quality market data avail-
able for use in the analysis. The appraiser must investigate and analyze the available market
data. Because the market is always changing, reliable data may not always be available for
all three approaches, so all three indicators of value may not always deserve equal weight.
More weight is placed on the indicators with the strongest market-based information.
179
When deriving a final conclusion of value from the investigation and analysis of the
market, an appraiser must apply judgment, experience, and common sense to properly cor-
relate the three value indications. A sound final value conclusion must be based on market
indicators, objective information, and a logical correlation.
Additional Reading
Austin, George T. Shreve’s Chemical Process Industries. 5th ed. New York: McGraw-Hill,
Inc., 1984.
Gary, James H., and Glenn E. Handwerk. Petroleum Refining: Technology and Economics.
3rd ed. New York: Marcel Dekker, Inc., 1994.
Guthrie, Kenneth M. Process Plant Estimating, Evaluation, and Control. Carlsbad, CA:
Craftsman Book Company, 1974.
Maples, Robert E. Petroleum Refinery Process Economics. Tulsa, OK: PennWell Publish-
ing Company, 1993.
Monthly Petrochemical & Plastics Analysis. Houston, TX: Chemical Data Inc.
Nelson, W. L. Petroleum Refinery Engineering. 4th ed. New York: McGraw-Hill Book
Company, Inc., 1958.
PEP Yearbook International. Menlo Park, CA: SRI Consulting,
Peters, Max S., and Timmerhaus, Klaus D. Plant Design and Economics for Chemical
Engineers. 2nd ed. New York: McGraw-Hill Book Company, 1968.
Additional Terms
The following are definitions or explanations of terms used in this chapter to assist
the reader who may be unfamiliar with terminology applicable to process plants.
Barrels per calendar day (BPCD)—The maximum amount a process unit
or oil refinery can process during a 24-hour period after making allowances
for downstream bottlenecks, types of inputs and products, environmental
constraints, turnarounds, and general maintenance and unscheduled
downtime.
Barrels per stream day (BPSD)—The amount a process unit or oil refinery
can process during a 24-hour period running at full capacity under optimal
conditions.
Blendstocks—Component materials that are mixed with the finished
products to improve the quality of the products.
Business enterprise value (BEV)—The value of the total invested capital
(long-term debt and stockholder’s equity) in an operating business.
Nonoperating assets (i.e., excess land, idle equipment, etc.) are not included.
180
Capacity creep—Small incremental increases in capacity over time.

Capacity factor—As it pertains to plant electrical capacity – a ratio of
electricity generated by a plant during a given time period to the electricity
the plant could have generated if it had operated at its installed capacity
during that period.
CAPEX—Capital expenditures; reserve of replacement or cash outflows
necessary to support and maintain current operations.
Commodity—Uniform quality goods actively traded in the market that are
most often used as inputs in the production of other goods or services such
as crude oil, gasoline, wheat, and corn.
Complexity—As it pertains to refineries – a measure of the relative
construction costs of refinery process units as they relate to the atmospheric
crude distillation unit.
Depreciation expense—A noncash expense used to depreciate the cost
of an item over a specific period of time. To calculate net cash flow, the
depreciation expense is added to the net income minus CAPEX minus
working capital changes.
EBITDA—Earnings before interest, taxes, depreciation, and amortization.
Equivalent distillation capacity (EDC)—The summation of the size of
each oil refinery process unit multiplied by its complexity.
Gross margin—In this text and the DCF examples herein, revenues less
raw material expense; a useful level of earnings to test for economic
obsolescence.
Intermediates—Partially finished components requiring further processing
to maximize their value.
Market multipliers—Market-derived multipliers that are applied to a level
of earnings to result in an indication of value.
Merchant plant—A plant that buys raw materials and sells products in the
competitive market at market rates.
Net margin—Revenues less all fixed and variable expenses except for
depreciation and interest expense; a useful level of earnings to test for eco-
nomic obsolescence.
Nominal dollars—Current dollars that reflect both real growth and inflation.
Noncash expense—An expense on an income statement that does not
reflect a cash outflow; depreciation expense.
181
Off-sites—Facilities required to support the primary process units such as

electric power distribution, water supply, treatment and disposal, tankage,
buildings, and fire protection.
Operating expenses—The total of fixed and variable expenses.
Own used fuel—Energy derived from the raw materials utilized in the
process plant but consumed on site.
Throughput—The total quantity of a process plant’s inputs.
Utilization—The actual operating rate of a plant compared to its normal or
designed operating rate.
Notes
1
The improvements that make up the real property portion of a process plant (i.e., that part that excludes the land) may or may not
require the expertise of a qualified real property appraiser. For this discussion, it is assumed that no such real property is included in
the example plant or in any of the comparable sales data. Therefore, only the land portion of the real estate is enumerated separately in
this discussion.
2
The number assigned herein for slate of products is ranking based on the capability of the plant to produce an assortment of products;
the number is not necessarily indicative of the number of products being manufactured.
3
For this example, the adjustments have been developed on a linear basis. If market evidence supports the use of a nonlinear basis or a
cost-to-capacity basis, the adjustments should be modified accordingly.
4
The appraiser should use judgment when assigning adjustment factors. Any method the appraiser feels appropriate may be used,
providing that adjustment is applied in the same manner across all of the comparable sales for the factor under consideration.
5
This time calculation also is different from the time calculations mentioned in previous chapters, where the time measurement is based
solely on chronological age.
6
Note that the composite adjustment factor for this example was derived by multiplying all of the adjustment factors. Elsewhere in this
text the methodology is shown whereby the adjustment factors all summed into an overall adjustment factor. Either method is acceptable
as long as the process is consistent and that the adjustment factors established by the appraiser are meaningful when compared to each
other. The appraiser may use whatever methodology believed to be consistent and appropriate to try to make all of the comparable sales
reflect the subject property.
7
Due to the interactive nature of the adjustments being applied to the process plant in this example, the adjustments applied here are
multiplied by each other, not solely added to reach an overall adjustment factor as described in Chapter 5 to show the alternative method
of assigning adjustment factors. The appraiser must use judgment when applying adjustment factors and ascertain what manner is most
appropriate for the case at hand, as described in the remainder of this chapter.
8
An appraiser may reflect a range as a value as opposed to a single point value if the appraiser feels a range to be more appropriate.
182
7
Appraising Assets in Groups
Objectives:
1. Provide an overview of a valuation process for appraising assets in
groups.
2. Discuss the differences between appraising assets in groups, asset-

by-asset, and mass appraising.
3. Provide guidance as to where and when appraising assets in groups is

appropriate and when it is inappropriate.
4. Describe the minimum information needed to appraise assets in groups.
The purpose of this chapter is to introduce the process of appraising a large quan-
tity of assets using a trend line technique. With few exceptions, the basic procedures for
appraising assets in groups are similar whether the MTS appraiser is valuing hundreds,
thousands, or even tens of thousands of computers, grinders, tools, or other classes of
machinery and equipment.
Appraising Assets in Groups Defined

Appraising assets in groups is the process of valuing a group of items as of a given
date by developing a ratio or factor that, when used as a multiplier against replacement1
cost of the subject property, results in a value reflecting all forms of depreciation.2
Appraising assets in groups differs from an asset-by-asset appraisal because judg-
ments are based on groups of property rather than that of each individual asset. In an asset-
by-asset appraisal, each individual value-making feature of the subject typically is analyzed
to determine its impact on the overall value conclusion for that specific asset. However,
when appraising assets in groups, some of the intricacies or specific value-making features
of the individual subject assets being analyzed may not be readily obvious. The applicable
principle is that the value of all of the individual value-making features (e.g., capacity,
physical size, power, speed) are typically reflected in both the asset’s replacement cost and
by the marketplace for used machinery and equipment. Thus, when the replacement cost
is multiplied by the factor developed in the used-price trend line, the amount of each of
the various individual value-making features will generally continue to be reflected, on a
depreciated basis, in the final calculated value.
Appraising assets in groups differs from a mass appraisal in that it excludes the
element of statistical testing and replaces it with the MTS appraiser’s analysis of the mar-
ket. The knowledge, logic, and experience the MTS appraiser uses to support appraisal
183
values appraising assets in groups are the same skills used in supporting an asset-by-asset
appraisal, but appraisal techniques generally used by assessors for mass appraisals empha-
size equations, tables, and schedules, collectively called models. This chapter describes a
trend line technique that is different from mass appraisal techniques because it emphasizes
and utilizes market evidence based on the appraiser’s valuation analysis, experience, and
judgment.
Uses of Appraising Assets in Groups

There is almost no area in which appraising assets in groups cannot be considered
as long as sufficient supporting market evidence can be obtained and the client and any
other intended users understand that, although valuation credibility and reliability on the
overall appraisal are retained, the accuracy of any individual asset may be less reliable than
that normally derived from an asset-by-asset appraisal.3 Appraising assets in groups can be
used for leasing (e.g., end of lease, renewal option, purchase option), ad valorem taxes (for
appeals), litigation, financial reporting, purchase price allocation, and bankruptcy.
The main factors that determine the reliability of the overall value conclusion when
appraising assets in groups are the
• Quality and quantity of the marketplace evidence
• Similarity of the equipment contained in the trend line market basket of
comparables (the manufacturers and models used to generate the data point
comparisons) with the subject assets
• Dispersion, or the degree of separation from the trend line, of market percent-
ages when plotted as a scatter diagram (The closer the data points are to the
average line, the greater reliability of the ratio.)
• Accuracy of the chronological age estimates of both the subject assets and the
actual comparable sales taken from the marketplace
• Accuracy of the condition estimates of both the subject assets and the actual
comparable sales taken from the marketplace
When Is Appraising Assets in Groups Appropriate?

Appraising assets in groups may be appropriate where
• A large quantity of assets exists that can be categorized into groups which,
over time, appreciate or depreciate in the marketplace at similar rates
• Reliability of the overall value conclusion, or the sum of many individual
assets, is more important and useful than accuracy of any single asset
• Configuration, components, and/or details of value-influencing specifica-
tions or features (e.g., capacity, physical size, power, speed) are not readily
available
Just as certain types of other appraisal techniques are not appropriate in every in-
stance, appraising assets in groups is not appropriate in every case. The appraiser must
analyze and consider the purpose, intended use, and intended users of the appraisal,
184
as well as the similarities of the subject asset population, to make a determination of its
appropriateness.
Appraising assets in groups is not appropriate where
• The subject assets cannot be grouped or stratified into categories with similar
appreciation and/or depreciation rates
• Reliable replacement cost is not known
• The acquisition date of the subject assets cannot be determined
• The type of the subject assets is not known
• The assets are located in different countries or economic zones4
The following is the minimum data needed to be known about the subject assets in
order to be able to appraise assets in groups:
• Type of equipment by category
• Replacement cost
• Historical acquisition date
• Condition
• Knowledge and applicability of item-specific and industry-specific deprecia-
tion factors
• The assets must be in similar economic zones or geographic areas
Profiling the Subject Assets

Once the MTS appraiser has determined that appraising assets in groups is appro-
priate, received agreement and understanding from the client (user of the appraisal) of the
intent to perform such an appraisal,5 and the appraiser has assembled enough information
to satisfy the stated minimum data, the next step is to organize the subject assets into groups
that can be compared for valuation purposes (i.e., they must have value characteristics that
are reflected in the marketplace in a similar manner over time). This typically is best done
using the type of equipment as the sorting or grouping criteria. For example, an inventory
of computer hardware can be grouped as follows:
• Mainframe computers
• Midrange computer equipment
• Desktop computers
• Laptop computers
• Peripheral computer equipment
Depending on the type of assets, available data, and the purpose and use of the
appraisal, machinery and equipment may be further stratified. Continuing with the com-
puter example, peripherals may be further grouped into monitors, printers, networking
equipment, and the like. In the metalworking industry, a compilation of various pieces of
machinery and equipment may be grouped as follows:
185
• Milling machines
• Drill presses
• Lathes
• Hydraulic presses
• Band saws
• Grinders
As an example of carrying this analysis to greater distinction, the machinery and
equipment might be further stratified, such as by sub-grouping the lathes into computer
numerically–controlled lathes, numerically-controlled lathes, and manual lathes.
These categorization and sub-categorization decisions are based on the appraiser’s
analysis of the subject assets, experience with the asset categories that appreciate or de-
preciate in the marketplace at similar rates over time, and the available data. The more
narrowly defined each asset group, the better the selection of relevant market comparables,
which ultimately renders a more credible conclusion of value.
Collecting Market Data

Appraising assets in groups utilizes a sales comparison methodology because they
are based on analysis of market evidence of similar properties (comparables) to the property
being appraised (subject).6 In a perfect world, the market sample of comparables should be
a mirror image of the subject assets. The quality and quantity of the collected data will
to a great extent determine valuation accuracy and credibility. In this context, quality
refers to how accurately the recorded information reflects the status of the subject equip-
ment and the actual sale price, and quantity refers to the amount of data that needs to be
collected.
There is no single answer as to how much data needs to be collected. This decision
depends on the appraiser’s judgment as to what is sufficient to show a consistent, reliable,
and credible price trend over time.
Comparable sales data should be screened for outliers. Outliers show up as sales
that appear to differ markedly from prices for similar equipment and may not reflect a
legitimate market value. One way to address outliers is to review all transactions that lie
outside a reasonable range. The smaller the amount of data collected, the more important it
is to analyze the reasons for outliers.
Outliers can have many causes. Some of the more common causes are
• The comparable sale occurred at a market level other than the one sought.
• Data may be incorrectly recorded. (In this case, the error can be corrected and
the data incorporated into the trend line development.)
• The comparable sale may include financing, extended warranties, removal
and/or installation, shipping, or other value-added factors that other arm’s-
length sales generally exclude, or conversely exclude factors that other arm’s-
length sales include. Comparable sales that do not represent an arm’s-length
market transaction should not be used.
186
• The comparable sale may result from an unusual combination of market

forces. The goal is to obtain an adequate number of valid sales.
• The comparable sale may reflect an asset or group of assets whose condi-
tion or actual configuration may not be the same as the other comparables
obtained.
• The comparable sale may have occurred in a different geographic area or
economic zone from the other market comparables. If sufficient data are
available, the appraiser may consider an alternative price trend line.
How the appraiser handles outliers may vary. If there are sufficient open-market,
arm’s-length comparable sales to produce a reliable and consistent price trend, a small
number of unexplained outliers may be rejected. If the number of arm’s-length comparable
sales observations is inadequate, and there is sufficient information concerning the cause,
it is then preferable to adjust the outlier comparable sale and use it rather than reject it. Too
many outliers may be an indication that an error exists in the comparables and/or replace-
ment costs.
The minimum transactional secondary market data necessary for appraising assets
in groups include
• Name of manufacturer
• Type of equipment
• Model number
• Replacement cost
• Chronological age
• Condition
• Economic zone of sale
• Market level of sale
• Sale price
• Sale date
Developing a Trend Line7

Trend lines, sometimes called depreciation tables, price curves, decline rates, or
percent to cost tables, represent the demand side of the market, and therefore should be
derived from the market. When appraising assets in groups, trend lines are developed from
the market by correlating comparable sales prices with chronological age. The purpose
of the trend line developed by the MTS appraiser is to generate a ratio that estimates the
decline or appreciation in the subject asset’s value over time.
The appraiser collects secondary market transactions of similar or comparable
equipment. These market prices are compared with the replacement acquisition cost of the
identical make and model equipment by dividing the secondary market transaction by the
replacement acquisition cost.
187
Example 1: Comparison of replacement acquisition cost of the identical

new item with a secondary market transaction.
Sale price of secondary market transaction
= % good ( which is the reciprocal of % depreciated )
Replacement cost when new
This comparison results in the percent of the replacement new cost remaining (the
reciprocal of the percentage loss of value) for that make and model, as reflected in the
secondary market comparable. That percentage is recorded as a point on a scatter diagram
based on the age of the secondary market comparable, such as shown in Fig. 7.1.
0.8
Replacement Cost
Percent Good of
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0 10 20 30 40 50 60
Age in Months
Figure 7.1. Scatter diagram of percent good to age.
The replacement cost of the subject assets that is used for the comparison in devel-
oping the trend line must be the actual acquisition cost in an arm’s-length transaction, not
the list price of the original equipment (unless the subject equipment was purchased at list
price). For any particular model, the actual retail price is typically the price advertised by
a vendor other than the manufacturer. The list price is the price advertised by the brand-
name original equipment manufacturer (OEM). Since the actual retail price typically is the
lower of the two, using list prices to establish new model values results in replacement base
prices that do not reflect real-world transaction prices for new equipment. This is because
equipment typically is purchased at a discount from list price. A trend line that compares a
secondary market price with the list price of new equipment will result in a steeper decline
rate than actually occurs in the marketplace.
188
Example 2. Comparison of new item with secondary market transaction.

Assume asset XYZ, for which the following information is known:
• List price is $10,000

• Historical retail new cost is $8,000, which is a 20% discount from the list
price
• A two-year-old XYZ sold in the secondary market for $6,000
If the list price is used, the calculation would be as follows:
 $6,000 
 $10,000  = 60% good (or 40% depreciated)
 
If the actual historical new cost is used, the calculation would be as follows:
 $6,000 
 $8,000  = 75% good (or 25% depreciated)
 
It can be seen that comparing the secondary market sale to the list price new reflects
an asset that depreciated 40%, when the actual loss was only 25%.
Adjusting for Definition of Value

Appraising assets in groups can be used to determine in-use or as-installed and fair
market values, as long as the proper adjustments are made. If the MTS appraiser is seeking
an in-use or as-installed value, and installation costs of the subject assets are incorporated
into their replacement costs, then no adjustment is necessary, because, as with other fea-
tures that create value, the value of installation will generally be reflected on a depreciated
basis in the final calculated value. Nor is any adjustment necessary if the MTS appraiser is
seeking a fair market value and the replacement costs are available on a comparable basis.
However, where installation costs are included in the replacement cost and a fair market
value is sought, or where an in-use or as-installed value is sought using replacement data
that do not include installation costs, then the appropriate adjustments will be necessary. In
order for the comparison to be meaningful, the secondary market data should be consistent
with the replacement costs. For example, if the appraiser is estimating an in-use or as-
installed value, both the replacement cost and the secondary market data should include
installation and other such costs. If the appraisal is for a removal value concept, then the
appraiser needs to verify that such installation costs are not included in any of the data
being used.
To adjust an in-use or as-installed value to a fair market value or to adjust a fair
market value to an in-use or as-installed value, the MTS appraiser first must determine the
typical percentage increase or decrease of the cost of installation as of the acquisition date.
This may be obtained from the client’s accounting records, manufacturers’ literature, or the
appraiser’s own marketplace research. The MTS appraiser may determine that installation
costs as of the acquisition date typically was a percentage of replacement cost, or an aver-
age flat cost for all assets in the group, possibly using installation on a man-hours per asset,
or some combination of the flat costs and a percentage with a floor and a ceiling.
189
For illustration purposes only, assume the MTS appraiser determines that installa-
tion costs add 10% on average to the replacement costs, and the trend line ratio shows a 50%
multiplier. The final value conclusion would add 5% (50% × 10% = 5%) to adjust from a
fair market to an in-use or as-installed basis. Thus, if the replacement cost on a fair market
basis was $100, then $100 × 50% trend line factor equals $50 plus $5 ($100 × 10% × 50%)
equals $55 on an as-installed or in-continued-use basis.
Adjusting for Condition

Up to this point, the discussion has mostly concerned the decline in value correlated
with age. However, the condition of the asset also must be reflected in the multiplier, in
order for the use of appraising assets in groups to be accurate. One way to accomplish this
is to develop a factor that adjusts the trend line multiplier based on the condition of the sub-
ject. The paired sales technique described in the Sales Comparison Approach (Chapter 4)
of this text is useful for this purpose. For example, if the MTS appraiser determines that the
secondary marketplace places a 6% premium on excellent condition over good condition,
a 4% premium for good condition over fair condition, and a 5% premium for fair condition
over poor condition, the multiplier is adjusted by the appropriate factor depending on the
condition of the subject.
Example 3. Adjusting for condition.

A. If the subject asset is in “excellent” condition, a 6% premium added to a
“good” trend line ratio of 60% is calculated to be 63.6% as follows:
(60% × 6%) = 3.6% + 60% = 63.6%
B. If the subject asset is in “poor” condition, a 4% deduction from a “good” trend

line ratio of 60% is calculated to be 57.6% as follows:
(60% × 4%) = 2.4% deduction from 60% = 57.6%
This procedure is similar to the adjustments made for a single-asset appraisal using
the sales comparison approach, with the trend line ratio substituting for the sale price of
the comparable. In Example 3, assume the replacement cost of the subject asset was $100
and the sale price of the comparable was $60 (equivalent to the 60% trend line ratio), but
the comparable is only in good condition while the subject is in excellent condition. The
sales comparison approach requires adjusting the comparable up by 6%, which results in
an indicated value for the subject of $63.60.
Combining Trend Lines

In some instances, an appraiser may wish to use a single trend line as the multiplier
to an equipment population that originally had been stratified into different groups. In this
case, each trend line ratio is weighted to reflect the relative importance of each individual
group based on replacement cost, not quantity. Weighting based on quantity would pro-
vide an invalid valuation conclusion because the ratios are developed on depreciated value
from replacement cost, as Example 4 shows.
190
Example 4. Combining different trend line ratios into a single overall trend
line ratio by weighting.
An equipment population consists of the following groups:
• Three Type A machines with a total replacement cost of $5 million
• 500 Type B machines with a total replacement cost of $3 million
Assuming the trend line ratios for Year 2 are such that:
• Type A machines are valued at 60% of replacement cost based on the market.
• Type B machines are valued at 30% of replacement cost based on the market.
The correct calculation is based on replacement cost:
Type A Ratio
Group $ value Resultant % Group ratio Weighted ratio
divided by weighting (round to two
total $ value (rounded to one decimal places)
decimal place)
 $5, 000, 000 

=
 $8, 62.5%
= x60% 37.5%
 000, 000 
Type B Ratio
 $5, 000, 000   37.5% 

=
 $8, 000, 000  =  x30% 11.25%
   100.0% 
Then 37.5% from Type A plus 11.25% from Type B = 48.75%, rounded to 48.8%.
Final Ratio
Therefore, 48.8% × $8,000,000 = $3,904,000 as the correct overall value

conclusion.
Scatter Diagrams
A scatter diagram is a graph of the relationship between two variables, one inde-
pendent variable located on the horizontal (x) axis and the other dependent variable located
on the vertical (y) axis. When appraising assets in groups, the independent variable is typi-
cally the assets’ chronological age, while the dependent variable is typically the ratio, or
percent good, of the assets’ replacement cost. An upward sloping trend indicates increasing
value over time, while a downward curve indicates declining value. Figure 7.2 is a scatter
diagram of the relationship between chronological age and the sales ratio data shown in
Table 7.1.
191
Age in Months U/N

14 0.72
16 0.67
19 0.62
20 0.60
24 0.53
26 0.50
30 0.48
36 0.35
38 0.32
42 0.27
44 0.21
48 0.18
50 0.12
55 0.07
U/N: The ratio of used equipment price based on the market divided by the replacement
cost when the equipment was new.
Table 7.1. Data for scatter Figure 7.2.
Figure 7.2 uses the data points shown in Table 7.1.
0.8
Percent Good of Replacement
0.7
0.6
0.5
0.4
Cost
0.3
0.2
0.1
0.0
0 10 20 30 40 50 60
Age in Months
Figure 7.2. Scatter diagram of percent good to age.
192
Where there is limited data, such as in Fig. 7.2, an initial, rough trend line can be
generated by simply connecting the dots, as shown in Fig. 7.3.
0.8
Percent Good of Replacement
0.7
0.6
0.5
0.4
Cost
0.3
0.2
0.1
0.0
0 10 20 30 40 50 60
Age in Months
Figure 7.3. Trend line of Figure 7.2 scatter diagram.
A more appropriate trend line may be developed by smoothing the line. There are
many ways of smoothing the trend line, but one of the simplest methods is with a mov-
ing average. The idea behind moving averages is that observations that are close in time
also are likely to be close in value. Therefore, taking an average of the points near an
observation will provide a reasonable estimate of the trend line at the observation. This
average eliminates some of the randomness in the data, leaving a smoother trend line. By
developing an appropriate trend line, an estimated ratio can be determined even where
no actual data point exists for the point in time. For example, in Fig. 7.4, the linear trend
line resulting from the existing data points can show an estimated ratio for 32-month-old
equipment, even though no actual data point exists for that age. The term moving average
is used because each average is computed by dropping the oldest observation and including
the next observation in the series. The averaging process moves through the series until
the trend line is computed at each observation for which points are available. Note that the
number of data points in each average remains constant and is centered on the observation
for which the trend line estimate is computed.
193
Figure 7.4. Trend line using smoothing techniques.
Instead of fitting a series of straight lines to the entire data set, a curved trend may
be more appropriate. Regression analysis is a method of fitting a much more flexible trend
curve to the data. Various types of regression analysis software are available to accomplish
this task.
In the scatter diagram shown in Fig. 7.5, there are many data points based on many
sales transactions in the marketplace at various selling prices, resulting in a range of ratios
for every point in time. In this case, regression analysis or data analysis software is avail-
able to develop a “best line fit” trend line simply and quickly.8
Figure 7.5. Scatter diagram with an abundance of data points.
194
Key Points
• When appraising assets in groups, the MTS appraiser develops a ratio, or factor,
based on the age of the equipment, which when used as a multiplier applied to
replacement cost, results in a value reflecting all forms of depreciation.
• Appraising assets in groups is not feasible where replacement cost is not known,
where the age of the assets cannot be determined, or when the type of equipment of
the subject assets is not known.
• Appraising assets in groups requires the subject assets to be organized into groups
that can be compared for valuation purposes (i.e., they must appreciate or depreci-
ate at similar rates over time).
• In order to use a secondary market comparable in developing a trend line, a replace-
ment cost with matching manufacturer and model number must be available to
reasonably establish the decline ratio.
• The main factors that determine the reliability of the overall value conclusion ,when
appraising assets in groups, are the quality and quantity of marketplace evidence;
the similarity of the comparables to the subject property used to develop the trend
line; the dispersion of market percentages recorded on the scatter diagram; the ac-
curacy of the chronological age estimates; and the accuracy of the estimates of
condition.
• It should be remembered that, as with all appraisal methodologies, sampling and
other techniques must be appropriately applied or the result may be something
less than that normally required by USPAP. The appraiser must be very careful to
ensure that the appraisal effort complies with all applicable USPAP performance
standards and ethical requirements, and the appraiser must be satisfied that the use
of these abbreviated methods do not result in an appraisal that is not credible or is
misleading.
Additional Reading
Joiner Associates Staff. How to Graph Plain and Simple (Student Edition) (Learning and
Application Guide). Madison, WI: Joiner Associates, Inc., 1995.
Miles, Jeremy, and Mark Shevlin. Applying Regression and Correlation: A Guide for Stu-
dents and Researchers. Thousand Oaks, CA: Sage Publications, 2001.
Notes
1
While this chapter uses the term replacement cost, the reader is advised to be aware that there may be occasions where the use of the
reproduction cost or historical acquisition cost is more appropriate or preferable.
2
In order to produce meaningful results, the secondary market data, a variable, must be compared to a stable, consistent, known
replacement cost. A similar analysis can be performed based on historic acquisition costs (and dates).
3
It should be remembered that, as with all appraisal methodologies, sampling and other techniques must be appropriately applied or the
result may be something less than that normally required by USPAP.
4
It is possible that an occasion may arise where a grouped appraisal process may not be applicable if the assets are impacted by different
item- or industry-specific depreciation factors. This particularly may be true regarding foreign appraisals that may require the appraiser
to analyze the data by specific subgroups or by country or economic region.
195
5
It may be necessary to obtain agreement and understanding not only from the client (user), but also from any other intended users.
6
As with any sales comparison approach methodology, current offerings or asking prices also may be used, providing appropriate
adjustments are made as discussed in Chapter 4: Sales Comparison Approach, even though this chapter only cites the use of actual
market sales.
7
In this chapter, the use of the term “trend line” does not refer to an index or price trend but rather to the term “trend” as in the tendency,
movement, or direction of data.
8
One such software is Microsoft Excel, but other spreadsheet programs also may be used.
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8
Report Writing
Objectives:
1. Describe the purpose and objective of appraisal reports.
2. Present and discuss USPAP Standard 8.
3. Present and discuss ASA’s Principles of Appraisal Practice and Code

of Ethics.
4. Present the basics of ASA’s MTS Report Writing Checklist.
5. Discuss report contents.
6. Discuss general considerations.
7. Provide general report writing recommendations.
8. Provide a sample report.
The appraisal report communicates the appraiser’s conclusion of value and details
the methods used and information considered in arriving at that conclusion. The report is
the work product received by the client and any other intended users. Therefore, it should
reflect positively on the appraiser’s efforts and diligence. The report should be accurate,
logical, and convincing, as well as conveying a high degree of professionalism. The reader
of an appraisal report should be able to understand the appraiser’s reasoning and methodol-
ogy, even though the reader may not be knowledgeable about the appraisal process.
Members of most professional appraisal organizations like ASA must adhere to the
Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP)
and the code of professional ethics stipulated by their individual organizations. USPAP
is revised every two years, and any reader of this text is cautioned to be aware that the
discussion herein is based on the USPAP version January 1, 2010, through December 31,
2011. Subsequent issues could change the report-writing requirements. However, USPAP
has been in existence for more than 20 years, and although future issues may change some
of the points discussed in this text, the editors believe that the underlying concepts and
discussion herein still largely will be applicable to the appraisal-writing process.
This chapter is designed to assist the appraiser in successfully preparing a well-
written appraisal report by building on some of the precepts as codified in USPAP and
discussing typical report contents and considerations. USPAP and ASA also have ethical
requirements that are discussed in greater depth in the next chapter of this text.
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Report Writing
Purpose and Use of Appraisal Reports

The purpose of an appraisal is to convey an opinion of value of specific property as
of a given date. The value to be determined might be replacement cost or fair market value,
among others, while the effective date might be current, prospective, or retrospective. The
use or “intended use” of the report is the reason why the report has been prepared. The
intended use addresses the needs of the client and other “intended users” of the report and
may include litigation, transaction, negotiation, insurance, financing, or accounting. Spe-
cific examples include property tax, income tax, gift and estate tax issues, business torts,
condemnation, eminent domain, insurance, lender liability, bankruptcy, litigation matters,
sale/leaseback, asset-based financings, and purchase price allocation. Instances such as
these may prompt the client to request, and the appraiser to provide, a comprehensive
narrative appraisal report.
In addition to conveying an opinion of value, the appraisal report should provide
the client and other intended users of the report with sufficient information to allow them to
understand the scope of work that the appraiser used in the appraisal process, the methods
employed in arriving at a value conclusion, and the salient factors that might have impacted
the concluded value. The client and intended users should be able to understand the find-
ings and to make an informed personal or business decision as it relates to the value of the
subject property appraisal.
USPAP Standards
USPAP contains the minimum standards for the development and reporting of
appraisals covering all appraisal disciplines, and ASA MTS appraisers are subject to the
personal property standards. USPAP Standards Rule 7, “Personal Property Appraisal,
Development,” addresses the valuation development portion of the appraisal; appraisal re-
porting is governed by USPAP Standards Rule 8, “Personal Property Appraisal Reporting.”
USPAP contains the minimum requirements an appraiser must meet. Appraisal reports
often contain much more than minimum requirements, as professional appraisers strive to
make their reports as comprehensive as possible.
MTS appraisals usually involve a wide variety and multitude of assets. USPAP
recognizes three forms of reports: Self-Contained, Summary, and Restricted Use. MTS
appraisal reports typically are prepared as Summary Reports. The primary difference be-
tween the three types of reports is the level of detail presented. The Self-Contained Report
“describes” the data considered and methodology employed; whereas a Summary Report
“summarizes” and a Restricted Use Report “states.”
Restricted Use Reports are used when the client has specific knowledge regarding
the subject property. A Restricted Use Report is solely for use by the client and cannot be
used when there are intended users other than the client. In producing a Restricted Use
Report, the appraiser must maintain a work file that contains all of the information neces-
sary to generate a Summary Report.
The key points of Standards Rule 8, “Personal Property Appraisal Reporting,” of
the January 1, 2010, through December 31, 2011 issue of USPAP are summarized here and
will be discussed in greater depth in the following paragraphs.
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Report Writing
STANDARD 8: PERSONAL PROPERTY APPRAISAL, REPORTING

In reporting the results of a personal property appraisal, an appraiser must communicate
each analysis, opinion, and conclusion in a manner that is not misleading.
Standards Rule 8-1
Each written or oral personal property appraisal report must:
(a) clearly and accurately set forth the appraisal in a manner that will not be misleading;
(b) contain sufficient information to enable the intended users of the appraisal to
understand the report properly; and
(c) clearly and accurately disclose all assumptions, extraordinary assumptions,

hypothetical conditions, and limiting conditions used in the assignment.
Standards Rule 8-2

Each written personal property appraisal report must be prepared under one of the
following three options and prominently state which option is used: Self-Contained Ap-
praisal Report, Summary Appraisal Report, or Restricted Use Appraisal Report.
(a) The content of a Self-Contained Appraisal Report must be consistent with the
intended use of the appraisal and, at a minimum:
(i) state the identity of the client and any intended users, by name or type;
(ii) state the intended use of the appraisal;
(iii) describe information sufficient to identify the property involved in

the appraisal, including the physical and economic property characteristics
relevant to the assignment;
(iv) state the property interest appraised;
(v) state the type and definition of value and cite the source of the definition;
(vi) state the effective date of the appraisal and the date of the report;
(vii) describe the scope of work used to develop the appraisal;
(viii) describe the information analyzed, the appraisal methods and

techniques employed, and the reasoning that supports the analyses, opinions,
and conclusions; exclusion of the sales comparison approach, cost approach,
or income approach must be explained;
(ix) state, as appropriate to the class of personal property involved, the use
of the property existing as of the date of value and the use of the property
reflected in the appraisal; and, when an opinion of the appropriate market
or market level was developed by the appraiser, describe the support and
rationale for that opinion;
(x) clearly and conspicuously:
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Report Writing
• state all extraordinary assumptions and hypothetical conditions; and
• state that their use might have affected the assignment results; and
(xi) include a signed certification in accordance with Standards Rule 8-3.
(b) The content of a Summary Appraisal Report must be consistent with the intended
use of the appraisal and, at a minimum:
(i) state the identity of the client and any intended users, by name or type;
(iii) summarize information sufficient to identify the property involved in

the appraisal, including the physical and economic property characteristics
relevant to the assignment;
(iv) state the property interest appraised;
(v) state the type and definition of value and cite the source of the definition;
(vii) summarize the scope of work used to develop the appraisal;
(viii) summarize the information analyzed, the appraisal methods and

techniques employed, and the reasoning that supports the analyses, opinions,
and conclusions; exclusion of the sales comparison approach, cost approach,
or income approach must be explained;
reflected in the appraisal; and, when an opinion of the appropriate market
or market level was developed by the appraiser, summarize the support and
rationale for that opinion;
(c) The content of a Restricted Use Appraisal Report must be consistent with the
intended use of the appraisal and, at a minimum:
(i) state the identity of the client, by name or type; and state a prominent
use restriction that limits use of the report to the client and warns that
the appraisers opinions and conclusions set forth in the report may not
be understood properly without additional information in the appraisers
work-file;
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Report Writing
(iii) state information sufficient to identify the property involved in the

appraisal;
(iv) state the ownership interest appraised;
(v) state the type of value, and cite the source of its definition;
(vii) state the scope of work used to develop the appraisal;
(viii) state the appraisal methods and techniques employed, state the value
opinion(s) and conclusion(s) reached, and reference the work-file; exclusion
of the sales comparison approach, cost approach, or income approach must be
explained;
reflected in the appraisal; and, when an opinion of the appropriate market or
market level was developed by the appraiser, state that opinion;
Standards Rule 8-3

Each written personal property appraisal report must contain a signed certification that is
similar in content to the following form:
I certify that, to the best of my knowledge and belief:
— the statements of fact contained in this report are true and correct.
— the reported analyses, opinions, and conclusions are limited only by the reported as-
sumptions and limiting conditions and are my personal, impartial, and unbiased profes-
sional analyses, opinions, and conclusions.
— I have no (or the specified) present or prospective interest in the property that is the
subject of this report and no (or the specified) personal interest with respect to the parties
involved.
— I have no bias with respect to the property that is the subject of this report or to the
parties involved with this assignment.
— my engagement in this assignment was not contingent upon developing or reporting
predetermined results.
— my compensation for completing this assignment is not contingent upon the develop-
ment or reporting of a predetermined value or direction in value that favors the cause of
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Report Writing
the client, the amount of the value opinion, the attainment of a stipulated result, or the
occurrence of a subsequent event directly related to the intended use of this appraisal.
— my analyses, opinions, and conclusions were developed, and this report has been pre-
pared, in conformity with the Uniform Standards of Professional Appraisal Practice.
— I have (or have not) made a personal inspection of the property that is the subject of
this report. (If more than one person signs this certification, the certification must clearly
specify which individuals did and which individuals did not make a personal inspection of
the appraised property.)
— no one provided significant personal property appraisal assistance to the person signing
this certification. (If there are exceptions, the name of each individual providing significant
personal property appraisal assistance must be stated.)
Standards Rule 8-4
To the extent that it is both possible and appropriate, an oral personal property appraisal
report must address the substantive matters set forth in Standards Rule 8-2 (b).
Other areas of USPAP that impact the appraisal report process include the following:
In addition to Standards Rule 8, USPAP addresses additional issues regarding appraisal
reporting in a series of statements that supplement the basic Standards Rule. Statements
3, 4, 6, and 9 apply to appraisal reporting and conclusions from these statements are listed
below.
CONCLUSIONS (SMT-3 Retrospective Value Opinions)
• A retrospective appraisal is complicated by the fact that the appraiser already
knows what occurred in the market after the effective date of the appraisal.
• Data subsequent to the effective date may be considered in developing a retro-
spective value as a confirmation of trends.
• The appraiser should determine a logical cut-off.
• Use of direct excerpts from then-current appraisal reports prepared at the time
of the retrospective effective date helps the appraiser and the reader understand
market conditions as of the retrospective effective date.
• In the absence of evidence in the market that data subsequent to the effective date
were consistent with and confirmed market expectations as of the effective date, the
effective date should be used as the cut-off date.
CONCLUSIONS (SMT-4 Prospective Value Opinions)
• Prospective value opinions, along with available factual data, are intended to
reflect the current expectations and perceptions of market participants. They should
be judged on the market support for the forecasts when made, not on whether spe-
cific items in the forecasts are realized.
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Report Writing
• It is appropriate to study comparable projects for evidence of construction peri-

ods, development costs, income and expense levels, and absorption.
• Items such as rental concessions, commissions, tenant finish allowances, add-on
factors, and expense pass-throughs must be studied to develop realistic income
expectancy.
• All value conclusions should include reference to the time frame when the analysis
was prepared to clearly delineate the market conditions and the point of reference
from which the appraiser developed the prospective value opinion.
• It is essential to include a limiting condition citing the market conditions from
which the prospective value opinion was made and indicating that the appraiser
cannot be held responsible for unforeseeable events that alter market conditions
prior to the effective date of the appraisal.
CONCLUSIONS (SMT-6 Reasonable Exposure Time in Real Property and Personal
Property Market Value Opinions)
• The reasonable exposure time inherent in the market value concept is always
presumed to precede the effective date of the appraisal.
• Exposure time is different for various types of property and under various market
conditions.
• The answer to the question “what is reasonable exposure time?” should always
incorporate the answers to the question “for what kind of property at what value
range?” rather than appear as a statement of an isolated time period.
CONCLUSIONS (SMT-9 Identification of Intended Use and Intended Users)
• An appraiser must identify the client and other intended users as part of the
process of identifying the client’s intended use of an appraisal, appraisal review, or
appraisal consulting report, by communication with the client prior to accepting the
assignment.
• Identification of the intended use and intended users are necessary steps in deter-
mining the appropriate scope of work.
• Whether or not assignment results are credible is measured in the context of the
intended use of the opinions and conclusions.
• An appraiser should use care when identifying the client to ensure a clear un-
derstanding and to avoid violations of the Confidentiality section of the ETHICS
RULE.
• The appraiser’s obligations to the client are established in the course of consider-
ing and accepting an assignment.
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Report Writing
• The appraiser’s obligation to intended users other than the client is limited to
addressing their requirements as identified by the appraiser at the time the appraiser
accepts the assignment.
• Identification of the intended use and intended users of the report is one of the
essential steps in order to identify the problem to be solved.
• An appraiser identifies the intended use and any intended users of an appraisal,
appraisal review, or appraisal consulting report by communicating with the client
before accepting an assignment.
• Appraisers can avoid misleading parties in possession of a report by clearly iden-
tifying the intended use and any intended users in the report and stating that other
uses and/or users are not intended by the appraiser.
• Except when specifically requested not to do so as part of the agreement with the
client, an appraiser must disclose the identity of the client and any other intended
users of an appraisal report in the report.
• If the client’s identity is omitted from an appraisal report, the appraiser must (1)
document the identity of the client in the workfile, and (2) provide a notice in the
appraisal report that the identity of the client has been omitted in accordance with
the client’s request and that the report is intended for use only by the client and any
other intended users.
The ethics section of ASA’s Principles of Appraisal Practice and Code of Ethics
addresses signatures in appraisal reports; these are described in Chapter 10. The user is en-
titled to assume that the signer of the report is responsible for all findings. In a joint report,
both signers are jointly and equally responsible, and the user has the right to know of any
dissenting opinions. If two or more appraisers are engaged to make independent appraisals,
the user has the right to expect that the opinions were reached independently.
USPAP deals with report signers in several different sections. The required certi-
fication must identify signers who have either inspected the property or identify by name
those who provided significant professional assistance. The inspection aspect is illustrated
and clarified in Advisory Opinion AO-2. This opinion addresses real property, but the refer-
ences to limited inspections can apply to personal property. If the inspection was of some
special nature, it should be so noted in the report. Advisory Opinion AO-31 illustrates and
clarifies the signature requirements when multiple appraisers are involved in an appraisal.
All appraisal reports must carry a signature. According to USPAP, a signature is
“personalized evidence indicating authentication of the work performed by the appraiser
and the acceptance of the responsibility for content, analyses and the conclusions in the
report.”
When a signing appraiser(s) has relied on work done by others who do not sign the
certification, the signing appraiser is responsible for the decision to rely on their work. The
signing appraiser is required to have reasonable basis for believing that those individuals
performing the work are competent and that their work is credible.
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Report Writing
The names of individuals providing significant personal property appraisal assis-

tance who do not sign a certification must be stated in the certification. A description of
their assistance must be included in the report.
To reiterate, the USPAP Standards and Statements are the minimum standards with
which ASA MTS appraisers must comply. Failure to do so violates the fiduciary respon-
sibility the appraiser has to the client and intended users of the report, and erodes public
trust in the appraisal profession. The public has a right to expect professionally prepared
and reliable findings from the MTS appraiser, and meeting the requirements of USPAP
Standards Rule 8 provides one such measure.
As mentioned earlier, many professional appraisal societies require their members
to abide not only by the minimum standards but also by additional standards set forth by
their governing bodies. ASA standards are set forth in Principles of Appraisal Practice and
Code of Ethics.
Section 8 of ASA’s Principles of Appraisal Practice and Code of Ethics discusses
the Society’s requirements for appraisal reports. The inclusion of certain specific explana-
tions, descriptions, and statements is required for appraisers who offer their services for a
fee to the general public. Many are similar to the standards found in USPAP. These require-
ments, along with notations specific to MTS reports, are listed below:
• 8.1 Description of the Property Which Is the Subject of an Appraisal Report
• 8.2 Statement of the Objectives of the Appraisal Work
• 8.3 Statement of the Contingent and Limiting Conditions to Which the Appraisal
Findings Are Subject
• 8.4 Description and Explanation in the Appraisal Report of the Appraisal Method
Used
• 8.5 Statement of the Appraiser’s Disinterestedness
• 8.6 Appraisers Responsibility to Communicate Each Analysis, Opinion, and Con-
clusion in a Manner that is not Misleading
• 8.7 Mandatory Recertification Statement
• 8.8 Signatures to Appraisal Reports and the Inclusion of Dissenting Opinions
Some of the differences between the ASA and USPAP requirements are elaborated
upon in the following sections of this chapter.
Oral Reports
As described earlier, according to USPAP there are three forms of appraisal reports:
Self-Contained, Summary, and Restricted Use. In addition to these three forms of written
reports, appraisers can be requested to report on a verbal, or oral, basis. In providing an
oral report, the appraiser must communicate the information that would be contained in
a Restricted Use Report and also must maintain a work file with sufficient data to al-
low the appraiser to produce a Summary Report. It is recommended that any oral report
subsequently be confirmed in writing. In the event an oral report is given via deposition or
testimony, the appraiser should maintain a copy of the record or write a summary of their
testimony and retain it in the workfile.
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Report Writing
ASA MTS Examiner Report Review Checklist

One of the requirements for those seeking accreditation by ASA as an MTS ap-
praiser is to submit appraisal reports for review. The Board of Examiners of the ASA has
prepared a checklist to serve as a guide to those MTS candidates seeking approval of their
appraisal reports. This checklist should not be relied upon as the sole authority for MTS
appraisal report content, but covers all of the major required points. Readers can find the
current version of the checklist under the MTS area of the ASA Web site (www.appraisers.
org). The main points of the checklist that were current as of October 19, 2009 are sum-
marized as follows:
Report Page
1.0 IDENTIFICATION
P F 1.1 Pass/Fail―Identity of client and users by name or type [8.2i]
P F 1.2 Pass/Fail―Property to be appraised [8.2iii]
1.3 Significant―Rights or interest in the property to be appraised (eg.,
Y N free and clear, leasehold fractional) [8.2iv]
Y N 1.4 Material―Basic company description of products and/or services
2.0 STATEMENT OF OBJECTIVES

2.1 Pass/Fail―Describe the scope of work, i.e., the approach(es) used,
P F research and analyses performed [8.2vii]
P F 2.2 Pass/Fail―Effective valuation date[8.2vi]
P F 2.3 Pass/Fail―Date report prepared [8.2vi]
P F 2.4 Pass/Fail―Purpose clearly stated [8.2ii]
2.5 Pass/Fail―Report identified as Self-Contained, Summary, or Re-
P F stricted [8.2]
2.6 Pass/Fail―Definition and source or authority for the value provided
P F [8.2v]
2.7 Significant―Premise of value appropriate for the stated use of the
Y N appraisal [8.2]
3.0 APPRAISAL METHODOLOGY

3.1 Significant―Identification of any sources used as the basis for the
Y N appraisal (e.g., Depreciation schedules, lease exhibits, asset lists)
Y N 3.2 Material―Details of any site visits
YN 3.3 Significant―Discussion about the condition of the assets
3.4 Pass/Fail―Income approach described and explained if not used
PF [8.2viii]
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Report Writing
3.5 Pass/Fail―Market approach described and explained if not used

P F [8.2viii]
3.6 Pass/Fail―Cost approach described and explained if not used
P F [8.2vii]
Y N 3.7 Critical―Explanation for not using an approach [8.2viii]
3.8 Significant―Are the approaches used appropriate for the type of
Y N property and for the stated purpose of the report?
4.0 APPRAISER’S QUALIFICATIONS
Y N 4.1 Critical―Demonstrated experience and professional involvement
Y N 4.2 Significant―Professional Qualifications or Curriculum Vitae
5.0 APPRAISER’S CERTIFICATION [8.3]
P F 5.1 Pass/Fail―Signed statement of disinterest [8.2xi]
P F 5.2 Pass/Fail―Performed in conformance with USPAP

5.3 Pass/Fail―Includes statement that compensation was not contin-
P F gent on value reported or on any predetermined value
5.4 Pass/Fail―Includes statement that no person other than those iden-
P F tified had any significant professional input [8.2vii]
5.5 Pass/Fail―Includes statement that, to the best of the appraiser’s
P F knowledge, all statements are true and correct
6.0 STATEMENT OF ASSUMPTIONS AND LIMITING

CONDITIONS
6.1 Pass/Fail―Statement included that the opinion of value is only for

P F the stated valuation date and only for the stated purpose [8.2vi, 8.2viii]
6.2 Material―Statement included listing reliance on data supplied by
Y N others without independent verification
6.3 Significant―Are the listed assumptions and limiting conditions
Y N appropriate for the engagement?
6.4 Significant―Where applicable, state all extraordinary assumptions
and hypothetical conditions and how their use might affect the results
Y N of the assignment [8.2x]
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Report Writing
7.0 OVERALL
Y N 7.1 Critical―Is the report understandable to the reader?

7.2 Significant―Is there replicability? Could another competent ap-
praiser follow the though process leading to the conclusion (not neces-
Y N sarily agree, but be able to understand how it was formed)?
7.3 Significant―Is the appraisal methodology appropriate for the pur-
Y N pose of the appraisal?
7.4 Material―Is the report internally consistent (e.g., nothing in one
Y N place that seems to contradict something somewhere else)?
Y N 7.5 Significant―No obvious omissions were found in the report

7.6 Critical―Does the report logically provide convincing support for
Y N the conclusion(s) reached?
7.7 Critical―Is the format acceptable professionally (spelling, gram-
Y N mar, layout)?
7.8 Pass/Fail―Signature on the report and the certification Note: If the
report was signed by two or more individuals, a signed statement from
the other individual(s) must accompany the submission and identify the
P F work product as that of the Candidate
Report Content
There is no single format that is correct or incorrect when preparing the appraisal
report. Structure and style are a matter of preference, and each appraiser or appraisal
company must decide what format best suits their and their client’s needs. However, by
adhering to USPAP and ASA’s code of ethics, most appraisal reports will be similar in
content. The following pages list some of the common components found in a well-written
appraisal report. It should be noted that the title page, letter of transmittal, and table of
contents as discussed here are not a requirement of USPAP or ASA, but appraisal reports
typically do include these as a matter of presentation.
Title Page
The title page (also known as the cover page) is, as the name implies, found at
the beginning of the report. The title page typically includes the name of the client, the
property appraised, the valuation premise, and the effective date. It also can include the
date of the report, appraisal company contact information, a seal of incorporation, a client
logo, and the location(s) of the subject property.
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Report Writing
Letter of Transmittal
The letter of transmittal is a letter that conveys the overall appraisal conclusions.
Commonly found after the title page, it summarizes the pertinent information contained in
the report. This information could include the date of issuance, salutation (usually to the
client), a brief description of the subject property, a statement of compliance with USPAP
and ASA’s code of ethics, type of report (Self-Contained, Summary, or Restricted Use),
premise(s) of value, effective date, overall conclusion of value, reference to findings being
subject to facts, circumstances contained in the accompanying appraisal, and the signature
of the author of the report.
Table of Contents
The table of contents lists the various sections of the report in the order in which
they appear. It also can reference an addendum and list of exhibits. The table of contents
allows the reader to quickly reference specific information contained in the report. For
complex appraisals requiring lengthy and detailed reports, this component is invaluable,
especially if the report is to be used during expert testimony.
Scope of Work
USPAP requires that all appraisal reports “describe the scope of work used to de-
velop the appraisal.” An appraisal report can be presented in many fashions, but ultimately
the report must adhere to this requirement.
Description of the Business or Basic Company Description

The description of the business provides an overview of the operations of the com-
pany whose assets are the subject of the appraisal. In addition to the company’s business
aspects, it can include information about the products produced, the facility layout, and in-
herent obsolescence. This section is an ASA requirement but is not a USPAP requirement.
The appraiser should not assume automatically that the reader has any significant level of
knowledge of the property or the products and/or services of the business, so a description
of the business in the appraisal report helps to alleviate that lack of knowledge.
Description of the Assets

The description of the assets provides an overview of the assets that are being
appraised. It provides a general description of the facility, process, machinery, equipment,
and other assets under consideration. It serves as an overview and typically references
the asset inventory listing where more detailed information can be found. It could include
specific details regarding the inspection process, including the date of inspection and the
names of contact personnel. Discussion of the overall plant condition, the major assets,
and their general condition could be included in this section. References to information
furnished by the client or others, such as asset lists, plans, specifications, capacities, or
other information used during the course of the investigation, could be found here as well.
Purpose and Intended Use of the Appraisal

The purpose of the appraisal addresses the valuation premise and date of value.
It describes the objective of the appraisal—to determine a conclusion of value, under a
premise of value, as of a specific date, for a particular asset or group of assets. It also
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identifies the interest in the assets being appraised. The effective date is the date for which
the appraisal is valid. It can be a recent, retrospective, or future date. It may or may not be
the same as the inspection date and is seldom the transmittal date. The intended use of the
appraisal discusses the reason why the appraisal was requested. The client’s intended use of
the report could include tax reporting, financing, negotiation, insurance, or litigation. This
component is a USPAP and ASA requirement and must be included in the report.1
Definition of Value
Appraisal reports must include the definition(s) of value and the source of such
definitions must be property cited. Often referred to as the premise of value, the definition
is a USPAP requirement. Common definitions include fair value, fair market value, and
orderly or forced liquidation value. Common sources for definitions include the glossary of
this text, the Appraisal Institute, the Internal Revenue Service, and the Federal Accounting
Standards Board (FASB). As previously noted, it is the appraiser’s responsibility to make
sure the definitions are consistent with the purpose of the appraisal.
Highest and Best Use Analysis

Highest and best use, as defined in this text, is the most probable and legal use of
a property (including machinery and equipment), which is physically possible, appropri-
ately supported, financially feasible, and that results in the highest value. It can influence
the appraiser’s selection of the appropriate premise of value, and ASA requires that it be
discussed even though it is no longer a USPAP requirement. USPAP addresses this topic in
the following comment to Standards Rule 7-3 (a), which states “In the context of personal
property, highest and best use may equate to the choice of the appropriate market or market
level for the type of item, the type and definition of value and intended use of the appraisal.”
Approaches to Value
Only ASA requires that all approaches to value—cost, sales comparison, and in-
come approaches—be described. Both ASA and USPAP require the appraisal report to not
only mention the approaches to value, but that the exclusion of a particular approach in the
analysis be explained.
The cost approach begins with the replacement cost of the subject property and
deducts for loss in value over time caused by physical deterioration, functional obsoles-
cence, and economic obsolescence. The sales comparison approach begins with sales or
asking prices for similar property and adjusts the sales to reflect their compatibility with the
subject property. The income approach utilizes income data to calculate the present value
of future economic benefits (income stream) generated by the property.
Methodology
The methodology section elaborates on how the approaches to value were applied,
by identifying the specific steps used in the valuation process. In the Self-Contained Report
it describes all data used and information analyzed to develop the conclusions.2 It also
discusses how the findings were reconciled, if more than one approach was applied. In the
Summary Report this data is summarized, and in the Restricted Use Report it is simply
stated.
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Although USPAP only requires a summary of the valuation data in the Summary
Report, it is advisable to include additional information if the appraiser deems it appropri-
ate. This additional information might include detailed valuation data for the major assets,
a list of sources and contacts, and an overall summary of the market or industry conditions.
The ASA MTS report checklist suggests the appraiser ask the following question: “Could
another competent appraiser follow the thought process leading to the conclusion (not
necessarily agree, but be able to understand how it was formed)?” Therefore, according
to ASA, it falls upon the preparer of an appraisal report to be sure that the reader fully
understands the methodology used in sufficient detail, that the reader may be satisfied that
the author was capable of following a logical process to a supportable conclusion, even
though another appraiser may not reach the same conclusion.
Summary of Conclusions
This section recaps the information presented in the transmittal letter of the report.
It can be used to further categorize the findings by summarizing totals by location, asset
class, company account, or some other meaningful field of information.
Statement of the Contingent and Limiting Conditions

Contingent and limiting conditions are an integral part of the report and define
the framework for what has or has not been performed during the course of the appraisal.
Sometimes referred to as general assumptions and limiting conditions, this section usually
is presented as a series of statements.
This section of the report also could address any hypothetical conditions or ex-
traordinary assumptions, if they were used to develop the value conclusions. As USPAP
requires the report to “clearly and conspicuously” state all extraordinary assumptions and
hypothetical conditions and also to state that their use may have affected the assignment
results, some discussion as to any hypothetical conditions and/or extraordinary assump-
tions and why they were used should be contained in the body of the report.
Statement of the Appraiser’s Disinterest, Certification

Both USPAP and the ASA code of ethics require that the appraiser’s certification
be included in the report. USPAP Standards Rule 8-3 states, “A signed certification is
an integral part of the appraisal report. An appraiser who signs any part of the appraisal
report, including a letter of transmittal, must also sign this certification.” It is not necessary
that the format of the certification statement be copied verbatim from USPAP; however, a
signed certification that is similar in content must be included in the report. ASA further
requires that a statement regarding its mandatory recertification program be included in the
certification as follows: “The American Society of Appraisers has a mandatory recertifica-
tion program for all of its Senior Members. ‘I am’ or ‘I am not’ in compliance with that
program.” An appraiser may add anything to the certification statement that the appraiser
feels is needed, but the minimum USPAP certification statement must appear in all ap-
praisal reports.
Qualifications of the Appraiser

Although not required by USPAP, it is recommended that appraisal reports include
the appraiser’s credentials. A statement of qualifications, resume, or curriculum vitae pro-
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vides the client and other intended users of the report with information about the appraiser’s
appraisal background, work experience, education, certification status, and employment
history. It can further assure the reader that the report has been prepared by knowledgeable
and professional individuals.
Asset Detail
The asset detail, also known as the asset inventory, typically is found as an exhibit
in the addendum of the appraisal report. It is the list of individual assets and their cor-
responding values that comprise the totals reported elsewhere in the report. The format of
this information is a matter of preference. Some fields of information may include location,
account, asset number, quantity, class, description, manufacturer, model, serial number,
condition, and values. Often this inventory will be prepared in a spreadsheet format.
Addendum
The addendum is a separate section of the appraisal report, often tabbed and usu-
ally found at the back of the report. As mentioned above, it is where the asset detail is
presented. The addendum is a good location for other exhibits, including such things as
client-furnished data, fixed-asset schedules, plot plans, drawings, photographs, charts,
graphs, articles and various other noteworthy materials.
General Considerations
As mentioned in the introduction to this chapter, the appraisal report is the culmi-
nation of the work conducted by the appraiser. The report communicates the value that
was concluded and describes, summarizes, or states the process that the appraiser used
in arriving at this value, depending on the form of the report that was used. It should be a
well-written document that conveys not only the conclusions developed during the valua-
tion process, but also contains sufficient information so that the client and other intended
users of the appraisal can understand the methods used by the appraiser and the relevant
facts and circumstances leading to the conclusion. The ultimate goal of the appraisal report
is to provide users with reliable information from which they can make sound business
decisions.
In preparing the appraisal report, the appraiser should recognize that the client may
not be the only user of the report, and for this reason the appraiser must be unassuming
regarding the knowledge level of the reader. Though the client may intimately know his
business and assets, the lender, attorney, insurer, or other intended user or third party using
the appraisal may not. Rudimentary information therefore should be included to ensure that
all readers have a basic understanding of the assets, business, or processes. Specific details
regarding the assets and valuation methodologies also should be thoroughly addressed.
Prior to issuing the final appraisal report, it is recommended that the appraiser ad-
here to a formal review process. This might include having someone other than the author
review the work. This is very important, especially if forms, templates, or other boilerplate
has been used in preparing the report. In addition to comparing the appraisal report to the
MTS Checklist, the appraiser might want to review the report in the context of the follow-
ing questions:
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• Are the report date and appraisal date correct?

• Are the client and other intended users clearly identified?
• Are the purpose and intended use clearly stated?
• Is the objective clearly stated?
• Is the premise of value valid for the intended use?
• Is the source of the definition of value identified?
• Is the appraisal scope clearly stated?
• Is the business described?
• Are the property rights or interests identified?
• Is the highest and best use or level of trade addressed?
• Is the type of report identified?
• Is the appraisal methodology adequately described?
• Is the condition of the assets discussed?
• Is the report understandable to the reader?
• Are the three approaches to value discussed?
• Can another competent appraiser follow the thought process leading to the
conclusion?
• Is the report free of inconsistencies?
• Is the format professional?
• Are the assumptions and limiting conditions appropriate?
• Is the appraiser’s certification complete, signed, and included?
• Is the reconciliation of various approaches explained?
• Are the adjustments explained and supported?
• Are there any obvious omissions?
• Is the report properly signed?
• Are the appraiser’s qualifications included?
• Is the report something you can be proud of?
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SAMPLE APPRAISAL REPORT

The following reflects various sections of an appraisal that have been included
herein to give the reader some idea of how some portions of an appraisal may look. It is
not intended to be used as a complete appraisal report and has been included for reference
purposes only.
ALL OF THE INFORMATION CONTAINED IN THE FOLLOWING SAMPLE

APPRAISAL REPORT IS TO BE USED FOR REFERENCE PURPOSES ONLY.
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SAMPLE APPRAISAL REPORT LETTER OF TRANSMITTAL

A letter of transmittal is not required by USPAP or ASA, but the following is a
typical letter of transmittal which may include the following for reference purposes.
Note that the purpose, intended use, and intended users of the appraisal are con-
tained here, as well as the value and the premise of value. Note also that the source of the
premise of value is properly cited.
January 21, 2010

Ms. Jane Doe, Regional Manager
The Hospital Group
XXX Main Street
Anywhere, USA
RE: The Offices of Doctor X, M.D., XXX Main Street, Anywhere, USA
Dear Ms. Doe:
We are pleased to herewith submit our appraisal with a summary appraisal report
of the captioned personal property located at the above indicated address for the
offices of Doctor X in Anywhere, USA. An inspection of the property was made on
January 10, 2010. The effective date of this appraisal is January 10, 2010.
The purpose of this appraisal is to estimate the fee simple fair market value in
continued use as requested by The Hospital Group, who is our client, of the
personal property as of January 10, 2010, for use in sale/purchase negotiations
under a value definition as follows:
Fair Market Value in Continued Use with Assumed Earnings is an opinion,

expressed in terms of money, at which the property would change hands
between a willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowledge of
relevant facts, as of a specific date and assuming that the business earnings
support the value reported. This amount includes all normal direct and
indirect costs, such as installation and other assemblage costs to make the
property fully operational.
This amount includes all normal direct and indirect costs, such as installation and
other assemblage costs to make the property fully operational.1 The fair market
value in continued use, as of the effective date of this appraisal, is shown in the
below rounded amount.
Fair Market Value In Continued Use
$12,000 (Twelve Thousand Dollars)
1
The American Society of Appraisers, Valuing Machinery and Equipment, (Herndon. VA: The American Society of Appraisers, 2010).
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SAMPLE APPRAISAL REPORT—SCOPE OF WORK

The following reflects some of the points that may be addressed to meet the scope
of work requirements.
SCOPE OF WORK
The scope of work for this appraisal included, but was not limited to, the following:
1. Discussions and agreement with Ms. Jane Doe of The Hospital Group
regarding the intended use and intended users of the appraisal as outlined
elsewhere in the appraisal report.
2. Briefly describing the property and its environment.
3. Making a site inspection of most of the personal property.
4. Conducting an analysis of the market in the vicinity of the property.
5. Researching reproduction or replacement costs.
6. Conducting a search for, and analysis of, sales of similar types of
properties.
7. Considering the application of the cost, sales comparison, and income
approaches to value and applying the relevant valuation methods as deemed
appropriate. (A more detailed explanation of the methods and techniques
used in the three individual approaches is located in this report.)
8. Reconciling the three personal property approaches to value for the final
value estimate.
9. Preparing a summary report based on all findings.
It has been a distinct pleasure to serve you.
Respectfully submitted,
XYZ VALUATIONS
Mr. Appraiser
Mr. Appraiser, ASA, President
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Report Writing
SAMPLE APPRAISAL REPORTCERTIFICATION OF APPRAISER

The following reflects a certification that follows the USPAP requirements. Note
also that it follows ASA’s requirements and includes the mandatory recertification state-
ment required by ASA.
I certify that, to the best of our knowledge and belief:
— the statements of fact contained in this report are true and correct;
— the reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are my personal,
impartial, and unbiased professional analyses, opinions, and conclusions;
— I have no present or prospective interest in the property that is the subject
of this report, and I have no personal interest with respect to the parties
involved;
— I have no bias with respect to the property that is the subject of this report
or to the parties involved with this assignment;
— my engagement in this assignment was not contingent upon developing
or reporting predetermined results;
— my compensation is not contingent upon the development or reporting
of a predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a stipulated result,
or the occurrence of a subsequent event directly related to the intended use
of this appraisal;
— my analysis, opinions, and conclusions were developed, and this report
has been prepared in conformity with the January 1, 2010 through Decem-
ber 31, 2011 version of the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation and the Principles of Appraisal Prac-
tice and Code of Ethics of the American Society of Appraisers;
— I made a personal inspection of most of the personal property assets at
the subject property on January 10, 2010;
— no one provided professional assistance to the person signing this report
regarding the valuation work for this appraisal;
— the use of this report is subject to the requirements of the American
Society of Appraisers to review by its duly authorized representatives;
— the American Society of Appraisers (ASA) has a mandatory recertification
program for all of its Senior members.
I am in compliance with the requirements of that program.
Mr. Appraiser January 21, 2010

Mr. Appraiser, ASA Date
President
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A table of contents is not required by USPAP or ASA, but if the appraiser chooses
to include one, it may look something like this sample.
TABLE OF CONTENTS
Page
Number
TITLE PAGE
LETTER OF TRANSMITTAL
CERTIFICATION OF APPRAISER
PREMISE AND PURPOSE OF THE APPRAISAL 24
APPLICABLE DATES 24
DISCUSSION OF THE BUSINESS AND ASSETS APPRAISED 24
THE SCOPE OF THE ASSIGNMENT 25
TERMS AND DEFINITIONS 26
VALUATION METHODOLOGY 28
APPROACHES TO VALUE 28
HIGHEST AND BEST USE AND LEVEL OF TRADE 28
METHODOLOGY USED 29
CORRELATION AND CONCLUSION 34
EXTRAORDINARY ASSUMPTIONS AND LIMITING CONDITIONS 35
EXHIBIT SECTION 36
EXHIBIT 1—DETAILED LISTING
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Report Writing

A section setting forth the premise and purpose of the appraisal may contain some
information as shown here.
PREMISE AND PURPOSE OF THE APPRAISAL
This appraisal was conducted for the purpose of expressing an opinion of

the fee simple fair market value in exchange as of January 10, 2010, for The
Hospital Group, who is our client, of the personal property consisting of
medical equipment and office furniture and equipment located at:
The Offices of Doctor X, M.D.
XXX Main Street
Anywhere, USA
It is our understanding that the intended use of this appraisal is for sale/purchase
negotiations.
This report is provided in the form of a summary report, as defined by USPAP.
The appraisal should specify clearly all of the pertinent applicable dates of an
appraisal.
The following dates are applicable to this appraisal.
Effective Date: January 10, 2010
Site Visit Date: January 10, 2010—The site tours were conducted by Doctor X.
Date of Report: January 21, 2010

Although not required by USPAP, ASA does require a discussion of the business
and assets appraised. The following is a very brief discussion of how an appraiser may
discuss a medical practice. Please take note that the condition of the assets also is cited
generally.
DISCUSSION OF THE BUSINESS AND ASSETS APPRAISED
The subject personal property is used in a single physician pediatric medical

practice.
We were told that the practice sees approximately 50–70 patients each day.
The areas generally consist of private office areas, examination rooms, lab/
test areas, break areas, and assorted work and storage areas.
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Report Writing
The property includes chairs, scales, examination tables, diagnostic units,

eye and ear test equipment, a telephone system and instruments, a computer
system and printers, copy machines, facsimile machines, desks, credenzas,
file cabinets, shelving, and miscellaneous other support equipment and
furniture, all of which is detailed in the Exhibit Section.
Nearly all of the items are in “fair” or “good” condition given their age and
usage.2
2 According to Valuing Machinery and Equipment (Herndon. VA: The American Society of Appraisers, 2010), the condition code is
defined as follows: “fair” is “machine used and operating, but requiring some minor repairs or replacement of minor parts;” “good” is
“machine used, but repaired or renovated and in excellent condition.”
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Report Writing
The scope of the assignment has been repeated here the same as it is shown in the
letter of transmittal. This accomplishes USPAP requirements because it is not sufficient to
merely include the scope of work in the letter of transmittal.
SCOPE OF WORK
The scope of work for this appraisal included, but was not limited to, the following:
1. Discussions and agreement with Ms. Jane Doe of The Hospital Group regard-
ing the intended use and intended users of the appraisal as outlined elsewhere in
the appraisal report.
2. Briefly describing the property and its environment.
3. Making a site inspection of most of the personal property.
4. Conducting an analysis of the market in the vicinity of the property.
5. Researching reproduction or replacement costs.
6. Conducting a search for, and analysis of, sales of similar types of properties.
7. Considering the application of the cost, sales comparison, and income ap-
proaches to value and applying the relevant valuation methods as deemed ap-
propriate. (A more detailed explanation of the methods and techniques used in
the three individual approaches is located in this report.)
8. Reconciling the three personal property approaches to value for the final
value estimate.
9. Preparing a summary report based on all findings.
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ASA requires that the appraiser explain all of the approaches to value and the
methodology used, while USPAP only requires the appraiser to explain why any of the
approaches were not used. The following is one format to meet all of these requirements,
although this may be accomplished in many ways.
VALUATION METHODOLOGY
APPROACHES TO VALUE
There are three recognized approaches to the determination of value: cost, sales comparison,
and income.
These approaches are accepted widely by financial institutions, courts, government

agencies, business, and society in general, and they establish theoretical concepts and
systematic methods. All appraisal methodology is based on the principle of substitution:
a prudent buyer will not pay more for an asset than the cost of acquiring a substitute
property of equivalent utility. These approaches are defined here briefly.
The purpose of this appraisal is to estimate the fee simple property interest, on the basis
of fair market value in continued use of the personal property as of January 10, 2010,
for use in sale/purchase negotiations under a value definition as follows:
Fair Market Value in Continued Use with Assumed Earnings is an opinion,
expressed in terms of money, at which the property would change hands between
a willing buyer and a willing seller, neither being under any compulsion to buy
or sell and both having reasonable knowledge of relevant facts, as of a specific
date and assuming that the business earnings support the value reported. This
amount includes all normal direct and indirect costs, such as installation and other
assemblage costs to make the property fully operational.3
For the fair market value in continued use analysis, we used the cost and sales comparison
methodologies for the various items. We relied on several sources of information,
including ABC Medical, XYZ Medical, eBay, Marshall Valuation Services, Med Online,
Medical Furniture Co., and other price information that appeared on the Internet. We
made adjustments to any of the data as we felt necessary to reflect the current local
conditions and the definition of value.
The valuation of the subject assets was performed following standards promulgated by
the American Society of Appraisers and is in compliance with the Uniform Standards
of Professional Appraisal Practice (USPAP).
The three approaches to value are referred to as the cost approach, the sales comparison
(market comparable) approach, and the income approach. All three approaches to value
rely upon the principle of substitution and recognize that a prudent investor will pay no
more for an asset than the cost to replace it new with an identical or similar unit of equal
utility. In the valuation of a business or its assets, each approach should be considered
to the extent feasible and relevant.
3
The American Society of Appraisers, Valuing Machinery and Equipment, (Herndon, VA: The American Society of Appraisers, 2010).
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Report Writing
For the valuation of the subject assets, we have used the cost approach and sales
comparison approaches to value. Although we considered the income approach, we
concluded that it was not applicable as it is not possible to attribute income to individual
fixed assets that are part of an operating business.
Cost Approach
The first step in the cost approach is to determine the current replacement cost new or
current reproduction cost new for the subject assets as defined in the definitions section of
this report. Under this approach, fair value is determined by adjusting the reproduction/
replacement cost new by the loss in value due to the various forms of depreciation—
physical, functional, and economic obsolescence—as defined in the definitions section of
this report.
The assets that are the subject of this appraisal were in service as of the valuation date, and
it is our understanding that they will remain “in use.”
In the sales comparison approach, recent sales and listings of comparable assets are
gathered. Adjustments then are applied to these observations for differences in location,
time of sale, and physical characteristics between the subject assets and the comparable
assets, to estimate a fair market value in continued use for the subject assets.
The comparative analysis performed in this approach focuses on similarities and differences
among assets and transactions that affect value, including differences in the assets appraised,
the motivations of buyers and sellers, financing terms, market conditions at the time of sale,
size, location, physical features, and economic characteristics. Elements of comparison are
tested against market evidence to determine which elements are sensitive to change and
how they affect value.
Income Approach
In the income approach, the present value of the assets is estimated upon the future eco-
nomic benefits of owning the property.4
Conclusion of Value
An income approach to value was considered as part of this analysis but was not applied.
We assumed that sufficient underlying economic support exists for the assets appraised
under the premise of value-in-use.
A combination of the cost and sales comparison approach to value was utilized in our
analysis to estimate the fair market value in continued use of the assets.
4
The American Society of Appraisers, Valuing Machinery and Equipment, (Herndon, VA: The American Society of Appraisers, 2010).
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Report Writing
Valuation of Assets
For the purposes of this appraisal we relied upon a combination of the cost approach and
sales comparison approach to estimate the fair market value in continued use of the assets.
For personal property where secondary market data was readily available, we applied and
relied upon the sales comparison approach to determine fair market value in continued
use. During our inventory process, we gathered additional descriptive information that al-
lowed us to contact used equipment dealers and compare the assets to various used market
publications.
For personal property that could not be valued using the sales comparison approach,
we have relied upon a cost approach to estimate the asset’s relative fair market value in
continued use. To estimate the replacement cost new, we utilized the asset’s historical
cost and applied the appropriate cost index from Marshall Valuation Service, a widely
recognized valuation guide.
The next step in this cost approach analysis was to multiply the replacement
cost new by a “percent good” factor. We calculated a percent good figure
for each asset based on its respective age, quality, condition, and estimated
remaining useful life. The percent good factor represents the remaining
value of the asset as a percent of its original cost, thus providing an estimate
of physical depreciation.
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Report Writing

ASA requires a discussion of the highest and best use and the appropriate market
and market level. USPAP requires a discussion of the current and alternative use and ap-
propriate market or market level when necessary for credible results. An appraiser might
reflect something like the following to meet these requirements.
HIGHEST AND BEST USE AND APPROPRIATE MARKET OR MARKET LEVEL
According to USPAP,
[I]n developing a personal property appraisal, when necessary for credible
assignment results, an appraiser must:
analyze the current use and alternative uses to encompass what is
profitable, legal, and physically possible, as relevant to the type and
definition of value and intended use of the appraisal;
Comment: In the context of personal property, highest and
best use may equate to the choice of the appropriate market
or market level for the type of item, the type and definition
of value, and intended use of the appraisal.
define and analyze the appropriate market consistent with the type and
definition of value; and
Comment: The appraiser must recognize that there are
distinct levels of trade (measurable marketplaces) and each
may generate its own data. For example, a property may have
a different value at a wholesale level of trade, a retail level
of trade, or under various auction conditions. Therefore,
the appraiser must analyze the subject property within the
correct market context.
analyze the relevant economic conditions at the time of the valuation,
including market acceptability of the property and supply, demand, scarcity,
or rarity.5
Given that the fair market in continued use definition of value assumes the
continuance or current and not an alternative use, the highest and best use of the
subject medical and office equipment is its use as part of a similar operation at
the same location, and given the fair market in continued use definition of value,
the appropriate level of trade is for the assets to change hands at a level of trade
between the current owner/seller to any other purchaser for the use of the assets in
similar operations at the same location.
5
The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice, (Washington, DC: The Appraisal
Foundation, January 1, 2010 through December 31, 2011), p. U-59 and U-60.
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Report Writing

Once an appraiser has applied all of the required methodology, the appraisal report
should reflect a summary and a correlation of values along with the conclusion of value.
Since this sample report used a combination of the cost and sales comparison approaches,
the appraiser might offer a correlation and conclusion like that which follows.
CORRELATION AND CONCLUSION
We correlated the various sources of information to render our final opinion
of value. The income approach was considered, but was found not to be
applicable to the case at hand.
The fair market value in continued use estimate, as of the effective date of
this appraisal, is shown in the below rounded amount.
Fair Market Value In Continued Use
$12,000 (Twelve Thousand Dollars)
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Report Writing
USPAP and ASA require an appraisal report to include all extraordinary assump-
tions and limiting conditions. Some items that may be included in such a section are shown
here.
EXTRAORDINARY ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal is subject to the following assumptions and limiting conditions:
1. All information presented in this report is true and accurate to the best of
the appraiser’s knowledge and belief.
2. Neither the appraiser nor any employee of ABC Appraisal Company,
Inc. has any current or contemplated future financial interest in the property
appraised.
3. The appraiser renders no opinion as to legal fee or title; it is assumed
to be marketable. Prevailing leases, liens, encumbrances, and assessments
have been disregarded, unless otherwise noted, and the property was ap-
praised as though free and clear, under responsible ownership, and compe-
tent management.
4. All estimates of value are presented as the appraiser’s considered opinion
based on information obtained during the investigation and do not represent
an offer to buy or sell.
5. No appraisal of land, buildings, or any intangibles that might exist was
made by ABC Appraisal Company, Inc.
6. Testimony or attendance in court by reason of this appraisal is not a
requirement of this engagement, unless such arrangements have been made
in advance.
7. This report must be used in its entirety. Reliance on any portion of the
report independent of others may lead the reader to erroneous conclusions
regarding the property values. No portion of the report stands alone without
approval from the author.
8. The effective date of the appraisal sets the basis of value, which is based
on the purchasing power of the United States dollar as of that date.
227
Report Writing

EXHIBIT SECTION
EXHIBIT 1—DETAILED LISTING
FAIR MARKET
ESTIMATED VALUE IN
QTY. DESCRIPTION CONDITION UNIT VALUES CONTINUED USE
4 Chairs, side arm, wood frame, fabric
upholstery. Fair $60 $240
2 Scales, Accu-Weigh, model XX, pediatric Fair $80 $160
3 Examination tables, Ritter, model XX,
manual tilt Good $200 $600
2 Diagnostic units, Welch Allyn model XX Good $250 $500
1 Set of eye and ear test equipment, Welch
Allyn model XX, including wall mounted
charger Fair $600 $600
1 Telephone system, AT&T model XX with
seven instruments Fair $600 $600
1 Computer, Dell Power Server model XX,
with XX-GB external drive, Cisco model XX
series network switch Fair $2,500 $2,500
2 Printers, HP LaserJet model XX Fair $300 $600
2 Copy machines, Xerox Document Centre
model XX, digital, with multiple paper trays,
collator, document feeder Fair $900 $1,800
2 Facsimile machines, Brother model XX Fair $600 $1,200
2 Desks, 36” × 60”, double pedestal, wood
grain veneer Good $400 $800
2 Credenzas, 20” × 60”, wood grain veneer Good $300 $600
3 File cabinets, five-drawer, lateral, metal Good $150 $450
1 Group of metal shelving Good $1,000 $1,000
1 Group of miscellaneous other support
equipment and furniture Fair $350 $350
TOTAL FAIR MARKET VALUE IN
CONTINUED USE $12,000
Figure 1
Note: Model numbers shown in the above detailed listing are for illustration purposes only.
228
Report Writing

The inclusion of the appraiser(s) credentials is not a requirement of USPAP or ASA,
but many appraisers do include them.
Mr. Appraiser, ASA
PROFESSIONAL EXPERIENCE
Engaged full time as a Machinery and Equipment Appraiser since 1990.
Senior Member of the American Society of Appraisers since 1997. Experi-
enced in many aspects of valuation, including: Litigation, Financing, Taxa-
tion, Allocation, Insurance, Leasing, Liquidation, Bankruptcy, Eminent Do-
main, and Property Records.
PROFESSIONAL DESIGNATIONS AND MEMBERSHIPS
ASA—Accredited Senior Appraiser, American Society of Appraisers (Cer-
tified to 2015)
AACE—Member, American Association of Cost Engineers
IRWA—Member, International Right of Way Association
ACADEMIC BACKGROUND
UNIVERSITY OF TEXAS—Bachelor’s Degree in Communications
APPRAISAL FOUNDATION—Uniform Standards of Professional Ap-
praisal Practice (USPAP)
CONTINUING EDUCATION—Valuation seminars and courses offered by
ASA and AIREA
PUBLICATIONS
M&TS Journal, “How to Appraise,” Volume XXX
“Appraising,” July 5, 2009, p. 219
“Valuation,” August 4, 2007, p. 296.
REPRESENTATIVE INDUSTRIES APPRAISED
Airline, Banking, Construction, Electronics, Food Processing, Forests,
Health Care, High Technology, Light and Heavy Manufacturing, Mining,
and Packaging.
PRESENT AND FORMER AFFILIATIONS
PRESIDENT—The Appraisal Company, New Town, Washington. Special-
izing in machinery and equipment appraisals for industrial, commercial,
and institutional clients.
SENIOR APPRAISER—AA Company, Appraisal and Valuation Division,
Seattle, Washington. Responsibilities included appraisals of machinery and
equipment and staff training.
229
Report Writing
Key Points
• The appraisal report is the culmination of the appraisal process.
• The goal of a well-prepared appraisal report is to furnish the client and intended
users with a factual document that can be relied on to make informed business
decisions.
• USPAP and ASA’s code of ethics have established various criteria and standards for
the preparation of personal property appraisal reports.
• Compliance with USPAP is mandatory for ASA members and candidates.
• It is the appraiser’s responsibility to stay current with changes in appraisal reporting
requirements.
Additional Reading
The American Society of Appraisers. Principles of Appraisal Practice and Code of Ethics.
Herndon, VA: American Society of Appraisers, 1994.
Anderson, Paul V. Technical Writing. 2nd ed. Orlando, FL: Harcourt Brace Jovanovich
College Publishers, 1989.
The Appraisal Foundation. Uniform Standards of Professional Appraisal Practice. Wash-
ington, DC: Appraisal Foundation, January 1, 2010 through December 31, 2011.
Bowers, Donald E., and James Lee Young, eds. The Professional Writer’s Guide. Aurora,
CO: National Writers Association, 1990.
Bunnin, Brad, and Peter Beren. The Writer’s Legal Companion: How to Deal Successfully
with Copyrights, Contracts, Libel, Taxes, Agents and Publishers, Legal Relationships and
Marketing Strategies. New York: Addison-Wesley, 1988.
Haines, Howard. “Writing Better Reports,” in the American Society of Appraisers, Ap-
praisal and Valuation Manual, 1961–63, Volume 7. Washington, DC: American Society of
Appraisers, 1964.
Himstreet, William C. Communicating the Appraisal: The Narrative Report. Chicago:
American Institute of Real Estate Appraisers, 1988.
Himstreet, William C. Writing Appraisal Reports. Chicago: American Institute of Real
Estate Appraisers, 1974.
Reilly, Robert F. “Illustrative Personal Property Appraisal Report Outline.” The M&TS
Journal 23:2, 2007.
University of Chicago Press Staff. The Chicago Manual of Style. 15th ed. Chicago: Uni-
versity of Chicago Press, 2003.
Zinsser, William. On Writing Well: An Informal Guide To Writing Non-Fiction. 5th ed.
New York: Harper Perennial, 1994.
230
Report Writing
Notes
1
Note: USPAP addresses the appraiser’s responsibility to make sure the premise of value is consistent with the intended use. A client
may request a specific definition of value for a given use, but if the definition is inconsistent with industry practice and the appraiser is
aware of this, he must advise the client otherwise and request the client to accept the appropriate definition, or else refrain from accepting
the assignment. A request for replacement cost intended for asset-based financing is one such example.
2
The appraisal report may include all, some, or none of the applicable comparable sales, sales adjustments, reproduction or replacement
cost, depreciation calculations, results of all research, publications, and resources. The decision as to the extent of what should and
should not be included in the appraisal report is left solely to the appraiser’s discretion, but such a decision does not remove the
appraiser’s responsibility to include proper documentation in the appraisal work paper files.
231
9
Valuing For Financial Reporting
Purposes
Objectives:
1. Introduce the MTS appraiser to the standards applicable to valuations for
financial reporting.
2. Provide some guidance on what the clients and their auditors expect.
3. Provide an introduction to the appraisal review process as it applies to

appraisals for financial reporting.
Current financial requirements have created a growing demand for valuations for
financial reporting purposes. Mergers and acquisitions (which, along with the periodic test-
ing requirements set forth in the standards, trigger all of this work) are more common as
businesses become more globalized and look for ways to expand. Any company (public or
private) that follows the Generally Accepted Accounting Principles (GAAP) or the Interna-
tional Financial Reporting Standards (IFRS) must perform a valuation whenever a merger
takes place or when a significant event occurs that may adversely impact the value of that
company’s assets.
To properly perform these valuations, the appraiser or valuer needs to be famil-
iar with the various standards and pronouncements set forth by the Financial Accounting
Standards Board (FASB), the International Accounting Standards Board (IASB), and the
International Valuation Standards Committee (IVSC). These standards and provisions
provide guidance on how valuations for financial reporting should be performed and the
specific areas that need to be considered when performing these valuations. This chapter
will briefly review the standards applicable to the MTS or Property, Plant, and Equipment
(PPE) appraiser. While the standards are applicable to all valuation disciplines (e.g., MTS,
Real Estate, Business Valuation), this chapter focuses in particular on how the standards
apply to the MTS discipline.
Valuations for financial reporting typically are multidisciplined projects and include
tangible asset valuation professionals (e.g., MTS, Inventory, Real Estate) and business and
intangible asset valuation professionals. It is important that all of the disciplines coordinate
their efforts. As with any multidisciplinary valuation project, communication among the
team members is important to assure that no assets are missed or double counted.
232
Valuing For Financial Reporting Purposes
In addition, the information obtained by the business intangible asset appraiser

might assist the tangible asset appraisers regarding potential economic obsolescence or
other factors that might impact the tangible asset appraiser’s conclusions of value.
The conclusions of the overall Business Enterprise Valuation (BEV) also can in-
dicate whether there is economic support for the values concluded by the tangible asset
professionals. The tangible asset appraisers cannot simply assume that the earnings support
the values they have concluded; this must be proven by the BEV.
Applicable Standards
The standards that will briefly be reviewed (as they apply to the MTS appraiser) are
the following:
• Statement of Financial Accounting Standards (SFAS) 141R: Business Com-
binations (Revised December 2007)
• SFAS 142: Goodwill and Other Intangible Assets (June 2001)
• SFAS 157: Fair Value Measurements (September 2006)
• SFAS 144: Accounting for the Impairment or Disposal of Long-Lived Assets
(August 2001)
The data discussed herein is not a complete discussion of each of the standards, nor
is it a comprehensive analysis of each of the standards. The MTS appraiser should obtain
copies of these standards and become familiar with them prior to performing valuations
which pertain to financial reporting.
This chapter provides a brief introduction to the various standards and will outline
some of the sections and guidance applicable to the MTS appraiser.
This chapter focuses solely on those standards applicable in the United States and
issued by FASB. IASB and IVSC have issued standards and Guidance Notes (GN) that
cover these issues, and in some ways mirror the standards issued by FASB. The differences
and other nuances between the FASB standards and the IASB/IVSC standards and guid-
ance are not discussed in this chapter. As valuations for financial reporting are occurring on
a global basis at an increasing rate, it is advisable for the reader to review and understand
the IVSC standards and how they differ from the FASB standards. As such, some of the
applicable IVSC standards will be noted for future reference, where appropriate.
As of July 2009, FASB completed a project known as Codification. Codification
had the following goals:
1. Simplify user access by codifying all authoritative U.S. GAAP in one spot
2. Ensure that the codified content accurately represents authoritative U.S.
GAAP as of July 1, 2009
3. Create a codified research system that is up to date for the released results of
standard-setting activity
The effective date of this Codification is September 15, 2009.
In general, Codification changed the standards-based model to a topically-based
model and compiled thousands of individual standards into approximately 90 topics. Fur-
233
ther details can be found in the document FASB Accounting Standards Codification Notice
to Constituents (v 2.0), issued by FASB in July 2009.
According to data available as of the printing of this textbook, the only effect Codi-
fication had on the standards covered in this chapter was a change in the reference number
and title for each; the content and application remained essentially the same.
The new nomenclature is listed in Table 9.1 and will be noted parenthetically where
appropriate in this text.
Former Standard Number and Title New (Codified) Nomenclature

SFAS 141R: Business Combinations Accounting Standards Codification (ASC) 805:
Business Combinations
SFAS 142: Goodwill and Other Intangible ASC 350: Intangible—Goodwill and Other
Assets
SFAS 157: Fair Value Measurements ASC 820: Fair Value Measurement and
Disclosure
SFAS 144: Accounting for the Impairment ASC 360: Property, Plant, and Equipment
or Disposal of Long-Lived Assets (Note: the topics discussed in SFAS 144 were
incorporated into ASC 360)
Table 9.1. FASB Standards Renamed as Part of Codification
Background:
Prior to the publication of the standards outlined in this chapter, there were existing
standards set forth by FASB (in the United States) and other accounting standards-setting
boards throughout the world, which provided guidance in valuing assets associated with
business combinations and other types of transactions. However, that guidance allowed
for two different ways of accounting for the opening financial balance sheet of the merged
companies. If a company used the first method, known as the “pooling of interests” method,
the balance sheets of the two merging companies were combined with little to no analysis
performed. If a company used the second method, known as the “acquisition method,”
valuation methodologies were used to value the newly formed company at its “fair market
value” (FMV) as of the date of the acquisition. Since two very different methods were ap-
plied, comparing the true value of two companies using different methodologies was often
difficult, if not impossible.
In addition, the bankruptcies of companies such as Enron and Global Crossing
demonstrated the need for more transparent financial statements. These companies pre-
sented inaccurate and/or incomplete financial statements that mislead the shareholders,
analysts, and general public. Additionally, the failure of many “dot.com” companies in the
mid- to late-1990s brought to the forefront the need to accurately measure a company’s
value and goodwill at various stages of a company’s history.
Furthermore, with the increasing globalization of business, accounting standards
setting boards throughout the world recognized a need to create a set of common valua-
tion and reporting standards. The standards outlined in this chapter are significant steps in
meeting both of these goals.
234
Prior to outlining the standards, it may be helpful to review some of the specific
terminology used. Many of the standard-specific terms used in this chapter can be found in
the Glossary section of this book.
SFAS 141R: Business Combinations (ASC 805: Business

Combinations)1
SFAS 141R: Business Combinations (ASC 805: Business Combinations) is an up-
dated version of SFAS 141: Business Combinations (originally published in June 2001).
SFAS 141R (ASC 805) is basically the “roadmap” for the valuation and reporting of values
in a business combination.
As stated in SFAS 141R (ASC 805):
The objective of this statement is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.2
SFAS 141R (ASC 805), which is effective for any reporting periods beginning after
December 15, 2008, requires that any business combination be valued by applying the
acquisition method (previously referred to as the “purchase method” in FAS 141).
The statement applies to any combination except for the following:
a. The formation of a joint venture;
b. The acquisition of an asset or a group of assets that does not constitute
a business;
c. A combination between entities or businesses under common control;
d. A combination between not-for-profit organizations or the acquisition
of a for-profit business by a not-for-profit organization.3
A summary of some of the pertinent concepts of SFAS 141R (ASC 805) that may
be meaningful to the MTS appraiser is outlined below:
• SFAS 141R (ASC 805) is broader in scope than SFAS 141. It applies to all
transactions, whereas SFAS 141 only applied to those transactions where con-
trol was obtained by transferring consideration (cash or cash equivalence).
The precepts of SFAS 141R (ASC 805) apply to all transactions or other
events in which an entity obtains control of one or more businesses, including
transactions achieved without the transfer of any consideration.
• SFAS 141R (ASC 805) requires that all assets (including contingent liabilities
and assets) be recognized as of the acquisition date and at their fair value. The
“cost allocation” guidance stated in SFAS 141 resulted in the recognition of
certain assets at dates other than the acquisition date and at a value other than
fair value.
• SFAS 141R (ASC 805) requires that all acquisition-related costs (e.g., consult-
ing, legal fees, due diligence fees, appraisal fees) be accounted for as separate
235
expense items, whereas SFAS 141 allowed the inclusion of these costs in the
acquisition price (and thus allowed them to be allocated among the assets).
• Under SFAS 141R (ASC 805), restructuring costs and other related costs are
to be recognized as separate expenses and not as a liability assumed as of the
acquisition date (as was the case with SFAS 141).
• In business combinations where the business combination is achieved in
stages, SFAS 141R (ASC 805) requires that the entire interest be recognized
as of the acquisition date. The guidance in SFAS 141 allowed for the recogni-
tion of the fair value of the assets and liabilities and of the associated goodwill
at each step of the transaction.
• Projects that involve in-process research and development (IPR&D) are to be
valued at a fair value under SFAS 141R (ASC 805) and should not be subject
to depreciation expense until the project is completed or abandoned. This is
different from SFAS 141 in that SFAS 141 required that IPR&D assets be
expensed.
One of the major differences between SFAS 141 and SFAS 141R (ASC 805) that
impacts the acquirer is the requirement that “negative goodwill” be recorded immediately
as a gain on the acquirer’s financial statements.
Goodwill is the excess amount of the purchase price above the combination of all of
the fair values of all of the identifiable tangible and intangible assets (as of the acquisition
date), liabilities, and non-controlling interests.
In its simplest form, goodwill equals:
Total price paid for acquisition

+ Assumed liabilities
Subtotal
− Sum of the allocated fair value of tangible assets
Subtotal
− Sum of fair value of identifiable intangible assets
The remainder of the calculation above is goodwill
Negative goodwill implies that the acquirer paid less for the company than the
actual fair value of the assets (both tangible and intangible), and can occur in the case of a
“bargain purchase.” Previously, SFAS 141 required that the negative goodwill be allocated,
pro rata, as a downward adjustment to the various allocated non-financial assets.
In order to comply with SFAS 141R (ASC 805), the newly formed business entity
will have to do the following:
• Identify and specify the acquirer and the acquiree in the transaction
• Determine the acquisition date
• Determine the purchase price
• Recognize any and all identifiable assets (tangible and intangible) and liabili-
ties assumed at their fair value (as of the acquisition date)
236
• Identify any non-controlling interests (if they exist)

• Recognize goodwill (or in the case of a bargain purchase, any applicable
gain)4
These steps are very similar to what must be done by appraisers in identifying the
appraisal problem and the scope of work as required by USPAP.
The first step to be performed is to identify the acquirer. The acquirer is the entity
that obtains control of the acquiree. The acquirer usually also is the client, or at least an
intended user (as defined by USPAP).
The acquisition date also needs to be determined. The acquisition date is the date
on which the acquirer obtains control of the acquiree.5 Typically, this is the closing date
of the transaction. The acquisition date becomes the valuation date. It is very important to
be mindful of this date because most clients do not hire appraisers at the same time as the
closing of the deal. In most cases, the acquisition date (and hence the valuation date) is in
the past. As such, most valuations performed under this standard are retrospective.
Retrospective appraisals require the appraiser to be concerned about items such as
the following:
• Trend choices
• Market comps
• Obtaining the correct asset listings (which tie to the general ledger as of the
valuation date)
• Discerning what is construction in process (CIP) versus booked assets as of
the valuation date
• Vehicle mileage and hour ratings for equipment as of the valuation date
• Equipment additions, transfers, or disposals after the valuation date
• Other potential issues
The purchase price also is important to identify. It is possible that the “total pur-
chase price” may include cash and other assets such as equity interest, or other contingent
considerations. As mentioned previously, under SFAS 141R (ASC 805), the purchase price
no longer includes transaction costs such as consulting, legal fees, due diligence fees, or ap-
praisal fees. These costs now must be tracked separately and expensed as they are incurred.
For MTS appraisers, the assets to be valued in a business combination are com-
monly called long-lived assets. Long-lived assets typically include any equipment, real
estate, and other tangible property.
SFAS 141R (ASC 805) does not include any specific guidance on the valuation of
tangible assets, but it does refer to SFAS 157 (ASC 820) as the guide for the valuation of
these assets. Assets held for sale should be valued under SFAS 144 (ASC 360). SFAS 157
(ASC 820) and SFAS 144 (ASC 360) will be outlined later in this chapter.
SFAS 141R (ASC 805) provides guidance for what is called a “measurement pe-
riod.” The measurement period is a time frame after the acquisition date during which the
acquirer is allowed to make retrospective adjustments to any provisional (or estimated)
entries they made in their financial statements as of the acquisition date. This measurement
period allows the acquirer to perform further analysis (such as appraisals) and identify any
237
additional assets or liabilities that may exist but were not known as of the acquisition date.
Any additional assets or liabilities that are identified are to be recognized and valued as if
they were known on the acquisition date.
The measurement period ends as soon as all necessary information is received by
the acquirer regarding the facts and circumstances that existed as of the acquisition date,
or the acquirer concludes that the information cannot be determined. In no case, however,
shall the measurement period be more than one (1) year from the acquisition date.
Since SFAS 141R (ASC 805) provides little to no guidance on the valuation of
tangible assets, the tangible asset appraiser should consult SFAS 157 (ASC 820).
SFAS 157: Fair Value Measurements (ASC 820: Fair Value

Measurement and Disclosure)6
IASB has published a discussion paper that is similar in content to SFAS 157 (ASC
820). It is the goal of both FASB and IASB to adopt a common document that provides
guidance on the determination of fair value. Whether this will be SFAS 157 (ASC 820) or
some other standard is still being discussed on an international basis.
SFAS 157 (ASC 820) provides some guidance on what needs to be considered
when valuing assets under SFAS 141R (ASC 805), SFAS 142 (ASC 350), and SFAS 144
(ASC 360). It also defines fair value, which is to be used as the value premise in all other
FASB-related statements.
In addition, there are ongoing discussions with IVSC to have the definition of fair
value as stated in SFAS 157 (ASC 820) become the accepted definition for financial valu-
ations throughout the world. SFAS 157 (ASC 820) defines fair value as:
“…the price that would be received for an asset or paid to transfer a liability in an
orderly transaction between marketplace participants at the measurement date.”7
Certain words are further clarified and defined in paragraphs 6 through 10 of SFAS
157 (and section 820-10-35 of ASC 820) and are summarized below:
Asset or Liability: SFAS 157 (ASC 820) clarifies that the measurement of
fair value should consider the following attributes of the asset (or liability)
being valued:
• The condition and location of the asset (or liability)
• Any liabilities or restrictions attributable to the sale of the asset (or trans-
fer of the liability) as of the measurement date
• Whether the asset (or liability) is “stand-alone” or if it is part of a group
(e.g., part of a reporting unit or business)
Orderly Transaction and Price: SFAS 157 (ASC 820) clarifies that an orderly
transaction assumes exposure to the market for a period of time which is
“usual and customary” for similar assets (or liabilities) and which is not a
forced liquidation or distressed sale.
In calculating fair value, the asset (or liability) is assumed to sell in the
principal (or most advantageous) market. This market is defined to be
“…the market in which the reporting entity would sell the asset or transfer
238
the liability with the price that maximizes the amount that would be received
for the asset or minimizes the amount that would be paid to transfer the
liability, considering transaction costs in the respective market(s).”8
Similarly to SFAS 141R (ASC 805), SFAS 157 (ASC 820) states that
the value placed on an asset (or the costs associated with the transfer
of a liability) should not be adjusted for transaction costs and that such
transaction costs should be accounted for as stated in other accounting
pronouncements. However, it does state that consideration must be given
to the costs associated with moving the assets to their principal or most
advantageous market, if applicable.
Market Participants: Market participants are buyers and sellers who are:
• Independent of and are not related to the entity (or assets) being valued
• Knowledgeable and have a reasonable level of understanding about the
facts regarding the entity (or assets) being valued
• Have the legal and financial means to buy or sell the entity (or assets)
being valued
• Willing buyers or sellers who are motivated, but not otherwise forced or
compelled to buy or sell
The market participants are essentially the “willing buyers” indicated in the univer-
sally accepted definition of FMV.
In estimating fair value, the reporting entity, and thus, the appraiser should identify
characteristics that identify general market participants. Specific market participants do not
have to be identified. In other words, when valuing personal property or machinery assets,
the appraiser needs to consider what a typical knowledgeable willing buyer would consider
when buying the asset.
SFAS 157 (ASC 820) further states that fair value assumes the acquired asset will
be used at its highest and best use which is defined as “….physically possible, legally
permissible, and financially feasible at the measurement date. In broad terms, highest and
best use refers to the use of an asset by market participants that would maximize the value
of the asset or the group of assets within which the asset would be used. Highest and best
use is determined based on the use of the asset by market participants, even if the intended
use of the asset by the reporting entity is different.”9
When performing a valuation for financial reporting, an appraiser needs to consider
what any typical knowledgeable and willing market participant would consider when buy-
ing the asset, not necessarily what the acquirer considered. In some cases, the general
marketplace as a whole may have a different set of considerations than the acquirer.
As an example, consider a location that is producing a product which is losing
money because the product it manufactured was sold as a loss leader. This plant was one
of several purchased in an acquisition. Let’s assume that most market participants would
consider closing this particular facility down, but the acquirer may continue to operate it
239
due to a specific internal need or plan. In this case, the appraiser would have to consider the
highest and best use of the plant as shut down and held for sale, not operating.
SFAS 157 (ASC 820) recognizes that there is a difference in value between an
in-use and in-exchange premise and provides guidance on how to determine which value
premise is appropriate under the prevailing circumstances.
SFAS 157 (ASC 820) specifies that, if the asset would provide maximum value to
a market participant in combination with other assets (i.e., its highest and best use is to be
used as part of an ongoing operation), then an in-use premise should be utilized. Under
this scenario, the asset would assume to be sold, and consequently operated, with the other
assets in its group.
However, if the asset would provide maximum value to a market participant as
a stand-alone asset (i.e., its highest and best use is to be sold on a stand-alone basis and
removed), due to a lack of income support or for any other reason, then an in-exchange
premise should be used. A valuation on this basis would assume that the asset would sell
independent of the other assets in its group.
The decision as to whether an asset should be valued on an in-use or in-exchange
basis depends on the highest and best use typical market participants (not necessarily the
acquirer) would place on the asset and, how they would price the assets accordingly.
An example may be the case where an acquired process plant has three production
lines, one of the lines has been idled, and the typical market participant would not operate it
in the future. In this case, the two operating lines should be valued using the in-use premise
and the idled line should be valued using the in-exchange premise. Since the idled line is
valued using the in-exchange premise, consideration would have to be given to what costs,
if any, might be attributable to making this line ready for sale on a stand-alone basis.
SFAS 157 (ASC 820) goes on to indicate that, in most cases, the transaction price
represents the fair value of the assets and liabilities transferred (as a whole).
Additional examples and clarification of this concept can be found in paragraphs
A6 to A11 of SFAS 157 for tangible asset appraisers. An intangible example begins in
paragraph A12. Section 820-10-55 of ASC 820 provides implementation guidance and
illustrations.
According to SFAS 157 (ASC 820), the following may be situations where the
transaction price may not represent the true fair value of the asset or liability:
• When the transaction is between related parties
• Where the sale was under a duress situation (such as a bankruptcy)
• Where the unit of account represented by the transaction price is not the same
as the unit of account measured at fair value (for example, if only one portion
of the assets transferred in a transaction is valued)
• The market in which the transaction occurs is different from the market in
which the reporting entity typically would sell the asset or transfer the li-
ability (i.e., if an asset is transferred in other than an arm’s-length transaction)
In the cases mentioned above, the fair value may be different from the transaction
price paid. It is up to the appraiser to value the assets at their fair value, regardless of the
transaction price.
240
SFAS 157 (ASC 820) also briefly describes the three approaches to value in terms
that are fairly consistent with ASA’s description of these approaches.
SFAS 157 (ASC 820) acknowledges that the valuation techniques used to conclude
fair value should include consideration of the market (sales comparison) approach, the
income approach, and the cost approach. The actual approach(es) to be utilized are those
which are “…appropriate in the circumstances and for which sufficient data are avail-
able….In some cases, a single valuation technique will be appropriate…. In other cases,
multiple valuation techniques will be appropriate. When multiple valuation techniques are
used…the results …shall be evaluated and weighed, as appropriate, in determining the
single estimate of fair value.”10
SFAS 157’s (ASC 820’s) recognition of multiple valuation techniques is consistent
with current USPAP Standards Rules 7-4 and 7-6. Standards Rule 7-4 describes what the
appraiser must do in order to develop credible results under the various approaches to
value. Standards Rule 7-6 requires the appraiser to reconcile the quality and quantity of
data available and analyzed within the approaches used and to reconcile the applicability
or suitability of the approaches used to arrive at the value conclusions.11
This is consistent with any other appraisal assignment where the appraiser needs to
investigate all three approaches to value (cost, sales comparison, and income) and decide
which approach(es) are the most appropriate given the data available. For example, if the
appraiser is able to gather adequate and reliable comparable sales (market) data on a par-
ticular asset class, then the sales comparison approach is the most appropriate approach for
those assets.
The next section of SFAS 157 (ASC 820) states that the valuation technique(s)
should be consistently applied during each subsequent valuation period (as defined in SFAS
142 [ASC 350]), unless a change in valuation technique(s) would produce a more represen-
tative fair value. This might occur if new information becomes available or improvements
to one of the techniques have been made.
In the application of all of the valuation techniques, SFAS 157 (ASC 820) defines
two different types of inputs:
a. “Observable inputs are inputs that reflect the assumptions market
participants would use in pricing the asset or liability developed based
on market data obtained from sources independent of the reporting
entity.
b. Unobservable inputs are inputs that reflect the reporting entity’s own
assumptions about the assumptions market participants would use in
pricing the asset or liability developed based on the best information
available in the circumstances.”12
Examples of observable inputs for the MTS appraiser might include, but are not
limited, to the following:
• Replacement cost new data
• Used asking prices or actual sales data
• Obsolescence factors based on market-derived data
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• Other data derived from sources independent of the entity being appraised
Examples of unobservable inputs for the MTS appraiser might include, but are not
limited, to the following:
• Replacement cost new data that cannot be verified through independent
research
• Estimates of fair value received from representatives of the entity being ap-
praised (that cannot be verified through independent research)
• Obsolescence factors based on data received from representatives of the en-
tity being appraised (that cannot be verified through independent research)
• Any value projections based on data received from representatives of the
entity being appraised (that cannot be verified through independent research)
• Any other data derived from sources the entity being appraised (that cannot
be verified through independent research)
Based on the guidance in SFAS 157 (ASC 820), the estimation of fair value should
maximize the use of observable (i.e., independent) inputs and minimize the use of unob-
servable (i.e., client-dependent or client-provided) inputs that cannot be verified through
independent research.
The next section of SFAS 157 (ASC 820) outlines what is referred to as the Fair
Value Hierarchy, which considers the relative reliability of inputs in the valuation process.
This hierarchy gives the highest reliability and priority to quoted prices (unadjusted) for
identical assets or liabilities in active markets (Level 1) and the lowest reliability and prior-
ity to inputs from the entity being valued (Level 3). The statement recommends that all
inputs be evaluated and weighted, as appropriate, when they are being considered in the
valuation process.
SFAS 157 (ASC 820) goes on to detail the various levels in their hierarchy. The
following is a brief summary of these levels:
• Level 1: These inputs reflect quoted prices for identical assets or liabilities in
an active market. An active market is one in which there is sufficient transac-
tions to provide ongoing pricing information. Caution must be taken when us-
ing transactions which occur after the close of a market, but which occur prior
to the measurement date as these may not be truly reflective of fair value.
Comment: For the MTS appraiser, a Level 1 input would be an exact match
comparable (in an active market) for each asset found during a valuation.
Because finding exact match comparables are rare, Level 1 inputs are used
seldom in MTS valuations.
• Level 2: These inputs reflect quoted prices in markets such as (a) quoted prices
for similar assets in active markets, (b) quoted prices for identical or similar
assets in not-active markets, (c) inputs other than quoted prices that are ob-
servable, and (d) inputs that are derived by correlating observable market data
(e.g., interest rates, yield curves observable at commonly quoted intervals,
default rates). These quotes may need to be adjusted in order to arrive at fair
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value. The statement cautions that, if the adjustments are large in nature, the
result may be less reliable, and thus, may actually be a lower-level (i.e., Level
3) estimate.
Comment: For the MTS appraiser, a Level 2 input would be an adjusted

market comparable (or cost new estimate) similar to each asset found during
a valuation. However, if the comparable requires significant adjustments,
thereby yielding unreliable results, the input may be considered a Level 3
input.
• Level 3: These inputs reflect inputs other than directly observed quoted prices.
This level may include input and assumptions from the reporting entity and
other unobservable inputs.
Comment: For the MTS appraiser, a Level 3 input might include a trend
and depreciation exercise using only client-provided data and assumptions
without any market-based adjustments or further analysis. This type of
analysis may not produce credible results. It is up to the appraiser to provide
credible results through independent verification and analysis.13
SFAS 157 (ASC 820) also details the various disclosure requirements for the ac-
quiring company. Appendix A of SFAS 157 (ASC 820) provides further guidance to the
provisions set forth in the statement. It also gives some clarifying examples.
SFAS 157’s (ASC 820’s) disclosure requirements and appendix are beyond the
scope of this chapter, but it is recommended that readers familiarize themselves with them.
SFAS 142: Goodwill and Other Intangible Assets (ASC 350:

Intangible—Goodwill and Other)14
Under SFAS 142 (ASC 350), each company with goodwill on its balance sheet
must test the carrying value of each reporting unit of the company to assess whether or
not there has been a potential decrease in goodwill. If the company’s overall fair value
decreases below its carrying value, a valuation of all the underlying tangible and intangible
assets may be required.
Testing is to be done at least annually or more often if there are/is:
• Significant changes in legal factors or the business climate
• An adverse action or assessment by a regulator
• Unanticipated competition
• A loss of key personnel
• An expectation that a reporting unit may be disposed
In the first step of the impairment test (outlined in paragraphs 19 through 25 of
SFAS 142 [and section 350-20-35 of ASC 350]), the company, either internally or through
the use of an outside valuation firm, estimates the fair value of each reporting unit and
compares it to the carrying value of each reporting unit, including any existing goodwill
specific to that reporting unit. If the fair value is greater than the carrying value for a report-
243
ing unit, that particular reporting unit is considered not to be impaired and no additional
analysis is necessary. If, however, the carrying value exceeds the fair value, the company
needs to perform an additional step to measure the amount of impairment loss, if any.
This second step is where MTS and other appraisers (including real estate, inven-
tory, and intangible asset appraisers) may become involved.
The carrying value for any asset is the value the company has on their books for
that asset. For tangible assets, the carrying value is the same as the net book value (NBV)
of the asset. Because goodwill (and other indefinite intangible assets) is not amortized, it is
the value recorded during the latest valuation.
As an example, assume that a company was purchased one year ago and the fair
values for a particular reporting unit were allocated as follows:
• Machinery and equipment: $25 million
• Real estate: $15 million
• Identifiable intangible assets: $0 million
• Goodwill and other indefinite intangible assets: $30 million
Total Fair Value: $70 million
Over the last year, the assets that were subject to amortization were depreciated,
and the results are as follows:
• Machinery and equipment (NBV): $20 million
• Real estate (NBV): $10 million
• Identifiable intangible assets: $0 million
• Goodwill and other indefinite intangible assets: $30 million
Total Carrying Value: $60 million
If the first step of the impairment analysis reflects that the fair value of the report-
ing unit is $75 million, then there is no impairment and the company does not need to
perform any further analysis on this particular reporting unit. However, if the first step of
the impairment analysis reflects that the fair value of the reporting unit is $55 million, that
reporting unit “failed” and an impairment of the goodwill may exist. Further analysis must
be performed to see if the goodwill is impaired (i.e., is lower than $30 million).
It should be noted that it is possible that the value of assets other than goodwill
(such as the tangible assets or other identifiable intangible assets) may be impaired in addi-
tion to or instead of the goodwill. The assets that are impaired will be identified during the
subsequent valuation analysis.
SFAS 142 (ASC 350) states the following:
• Once an impairment is recognized, it cannot be reversed; however, it can be
further lowered if impairments are found in subsequent tests
• An impairment loss recorded cannot exceed the carrying amount of the
goodwill
• An impairment of one reporting unit cannot be netted against the implied
increase of goodwill in another reporting unit
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• If the tangible assets appear impaired there are other tests (under SFAS 144
[ASC 360]) which must be run
As stated in paragraph 21 of SFAS 142 (ASC 350): “The implied fair value of
goodwill shall be determined in the same manner as the amount of goodwill recognized in
a business combination is determined.”15
Under the second step of the impairment testing, the valuation of tangible and intan-
gible assets of the business, and the allocation of the fair value of the reporting unit follows
the same rules and procedures outlined in SFAS 141R: Business Combinations (ASC 805:
Business Combinations). The fair value calculated in step one of the impairment analyses
is treated as if it were the price paid to acquire the reporting unit under analysis. Any excess
of the fair value of the reporting unit over the amounts assigned to assets and liabilities is
the implied fair value of goodwill. The goodwill impairment loss is the amount by which
the carrying value of the goodwill exceeds the implied fair value of goodwill.
SFAS 144: Accounting for the Impairment or Disposal of Long-Lived

Assets (ASC 360: Property, Plant, and Equipment)16
Valuations performed under SFAS 144 (ASC 360) are completed for two reasons:
1. Either the fair value of the company has been impaired to the point that all of
the goodwill and other intangible assets have been given a value of zero and
there is still some impairment which needs to be considered
2. The assets that are the subject of the valuation are held for sale or other dis-
position (including being scrapped, being permanently idled, or other similar
event)
Under SFAS 144 (ASC 360), impairment exists and an impairment loss needs to
be recognized if the carrying value of the asset is not recoverable and the carrying value
exceeds the asset’s fair value. The carrying value of a long-lived asset is not recoverable
if it exceeds the sum of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset (Step 1 of the SFAS 144 test). An impairment loss is
measured as the amount by which the carrying value of a long-lived asset exceeds its fair
value (Step 2 of the SFAS 144 test).
Under SFAS 144 (ASC 360), long-lived assets include the following:
• Individual long-lived depreciable and amortizable assets (e.g., machinery,
personal property, real estate)
• Capital leases of lessees
• Long-lived assets of lessors subject to operating leases
• Proved oil and gas properties accounted for using the successful-efforts
method of accounting
• Long-term prepaid assets
Excluded under SFAS 144 (ASC 360) are the following types of assets:
• Goodwill
• Other intangible assets not amortized
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• Equity method investments

• Financial instruments
• Deferred policy acquisition costs
• Deferred tax assets
• Unproved oil and gas properties using the successful-efforts method
• Financial accounting and reporting in the music/recording industry,
broadcasters, computer software, and regulated enterprises
These assets excluded under SFAS 144 (ASC 360) are covered under other FASB
statements, including SFAS 142 (ASC 350) and others.
According to SFAS 144 (ASC 360), the following events may trigger a potential
impairment to long-lived assets:
• A significant decrease in the company’s market price
• A significant adverse change in the long-lived asset’s use or physical
condition
• A significant adverse change in legal factors or the business climate
• Costs significantly exceeding original cost estimates
• Operating or cash flow losses
• Expectation of asset disposal significantly before end of previously esti-
mated useful life
Following a triggering event, an asset (asset group) needs to be tested for impairment.
When valuing assets under SFAS 144 (ASC 360), the appraiser must consider man-
agement’s intention to reduce the use of or idle the equipment being valued, regardless of
whether the equipment is operating as of the valuation date.
As such, the MTS appraiser may need to apply an extraordinary assumption or a
hypothetical condition based on guidance from company management regarding future use
(or potential lack of future use) of the assets which are the basis of the appraisal. USPAP
requires that all assumptions impacting the conclusion of value be stated in the report.
The following is the process used to test for impairment under SFAS 144 (ASC
360):
1. Perform an undiscounted cash flow. As part of the cash flow analysis, the
remaining useful life (as defined in the glossary of this text) of the primary
asset (or group of assets) must be determined. Often an MTS appraiser is best
suited to make this determination.
2. Compare the carrying value of the long-lived assets under analysis to the
undiscounted cash flows.
3. If the undiscounted cash flows indicate a value below the carrying value of
the long-lived assets under analysis, determine the fair value of the asset (or
group of assets) and compare this to the carrying value of the long-lived as-
sets under analysis.
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4. If the fair value of the long-lived assets under analysis is less than the carrying
value of the same assets, an impairment exists.
5. Measure, record, and disclose impairment loss.
Steps 1 and 2 are performed either internally by the company or by an outside inde-
pendent business valuation professional. The MTS appraiser may be utilized, as indicated
above, to assist in determining the remaining useful life of the asset or group of assets.
Step 3 typically requires the expertise of the MTS appraiser, as well as other tan-
gible asset valuation professionals, depending on the assets under analysis. At this stage,
the MTS appraiser is retained to value the asset or group of assets under the premise of fair
value less the cost to sell.17
Under Step 4, the fair value determined by the MTS appraiser and/or other tangible
asset professionals is subtracted from the carrying value to arrive at the impairment loss,
which is to be disclosed by the company.
Long-lived assets “held for sale” also are to be valued under SFAS 144 (ASC 360).
Long-lived assets to be sold are classified as held for sale if they meet all of these criteria:
• Company management commits to a plan to sell
• The assets are available for immediate sale in present condition
• There is an active program in place to locate potential buyers
• The sale is probable within one year (with some exceptions)
• There is an active market at a reasonable price (i.e., fair value)
• Significant changes to the plan are unlikely
All of the criteria stated above must be met if the asset is to be considered held for
sale.
With regards to assets held for sale, SFAS 144 (ASC 360) provides the following
information:
1. Long-lived assets or asset groups classified as held for sale are measured at
the lower of (a) carrying value or (b) fair value less the costs to sell (as deter-
mined by the MTS appraiser).
2. Costs to sell are incremental direct costs to transact a sale. These costs typi-
cally include broker commissions, legal and title transfer fees, and closing
costs, but exclude any potential future losses associated with asset operation.
The MTS appraiser can obtain this data through interviewing dealers, brokers,
and auctioneers and through other research.
3. (As of the date of the analysis) A loss shall be recognized by the company for
any initial or subsequent write-down to fair value less cost to sell; a gain shall
be recognized for any subsequent increase in fair value less cost to sell but not
in excess of the cumulative loss previously recognized.
4. A gain or loss not previously recognized, resulting from the sale of a long-
lived asset (disposal group), shall be recognized at the date of sale.
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5. While assets are held for sale, no depreciation/amortization is booked.

SFAS 144 (ASC 360) indicates that assets to be disposed of other than by sale (i.e.,
assets to be abandoned, assets to be exchanged for a similar productive asset, or assets to be
distributed to owners in a spin-off) should continue to be classified and treated as “held and
used.” The company then must revise its depreciation estimates to reflect the asset’s actual
use over a shortened period of time and adjust the remaining carrying value. The MTS
appraiser provides an integral role by determining both the useful life and the remaining
carrying value (which is equal to the fair value determined as part of the analysis).
Under a scenario of impairment or held for sale, the MTS appraiser needs to con-
sider the most advantageous marketplace, especially if the assets are idled or are to be
disposed.
In determining the most advantageous marketplace, the appraiser might consider a
variety of potential sales scenarios, including the sale of the assets as an entire operation,
as a subset of that operation, or on a piecemeal basis. Under a sales scenario where the
most advantageous marketplace is something other than as an entire operation, the MTS
appraiser must consider the costs associated with moving the assets and must make adjust-
ments to certain indirect costs, such as removal and freight to ship the asset to that market.
For example, if the most advantageous marketplace for the entire facility or cer-
tain assets is another country, the appraiser would need to estimate the costs associated
with movement of those assets to the other country and adjust their values accordingly. In
the case where the most advantageous marketplace is disposal of the assets, the appraiser
would need to estimate the costs associated with the disposal of those assets and adjust
their values accordingly.
Each of the various scenarios may bring on a variety of unique assumptions that
must be considered by the appraiser and described in their report. Such assumptions might
include the marketability of certain assets, potential asset buyers, and transferability of
contracts.
Client and Auditor Expectations18

Sound appraisal practice dictates that an appraiser always should understand what
the client’s expectations are from the onset. This also is covered by USPAP, under the
competency and scope of work rules. In a valuation performed for financial reporting, the
report and results will be used by both the acquirer and their auditor. The results become
part of the acquirer’s financial statements. As part of the process, the auditor needs to make
sure that the results are reasonable, and as such the valuation will go through a review
process.
The acquiring company should expect the following:
• A competent appraiser who understands how the results of their work
impacts the company’s financial statements.
• Reliable documented values to reduce the possibility of having to adjust
the results (under SFAS 142 [ASC 350] or SFAS 144 [ASC 360]) right
after an allocation or recognizing an unexpected capital gain.
• Reasonable support for why the values are above or below NBV. The
appraiser should be prepared to discuss market trends, why assets with
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a zero NBV might have value in the open market, the application of
obsolescence factors, and other items of interest to the acquirer.
Comment: It is common, with the exception of a valuation for impairment,
that a revaluation of the assets will result in a higher depreciation expense
for the company.
• A comparison of the fair value to the NBV for major asset categories
(summaries by their asset classes as stated on the asset listing are good
tools for this comparison).
Comment: As discussed in Appendix A and other chapters of this text book,

accounting depreciation has no relationship to appraisal depreciation and
an asset’s NBV is equal only to the value of that asset by coincidence. It is
important for the MTS appraiser to convey these concepts to the acquirer,
who may not completely understand the differences between accounting
depreciation and appraisal depreciation.
• Valuation data that reconciles to the fixed asset listings, including sup-
port to reflect changes in the revaluation and disposition of the assets.
• Provide the valuation conclusions in an electronic format to support the
importing of the data into the acquirer’s accounting software.
The auditor expects the following:

• A valuation that reconciles to the balance sheet of the company being appraised
• A valuation that is compliant with the appropriate GAAP and FASB (or IASB
and IVSC) standards
The auditor’s reviewer expects the following:
• A report that meets USPAP requirement and is consistent with the applicable
standards.
• A report that shows a general understanding of the industry and the marketplace.
• A valuation that is well documented and easy to follow, thereby streamlining
the review process.
• Evidence of using comparable sales data from the marketplace (as applicable)
in the analysis.
• Access to supporting documentation that show all of the relevant steps and
data utilized (e.g., index tables built from reliable sources, depreciation tables,
obsolescence factors applied, market overrides).
• Worksheets that tie to both the report and the work paper file. This is called
“cross referencing” in the accounting field, and it allows the appraiser and/or
reviewer to quickly find the backup data from which the final value conclu-
sion was derived.
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• Answers to their questions. For example, if a certain obsolescence factor is

applied, the appraiser should be able to explain how it was calculated and why
it is applicable.
• A valuation as of the correct valuation date.
• Proper use of the term fair value.
Appraisal Review
Because all of the valuations performed for financial reporting purposes have a
direct impact on the company’s financial statements, it is likely that the appraisal report
will be reviewed by the acquirer’s auditor. The audit team frequently relies on an internal
appraiser to assist in the review process.
The reviewer then should receive a copy of the report and any supporting docu-
mentation provided to the client directly from the client or only with the client’s express
approval. Based on this information, the reviewer usually develops a list of general and
specific questions regarding approaches used, methodologies applied, and other issues. In
addition to the questionnaire, one or more meetings or conference calls may be requested
in order to discuss the results of the valuation.
In general, it is the reviewer’s task to make sure that proper valuation techniques
and appropriate assumptions were used, appropriate data sources were utilized, and the
overall valuation is reasonable given the specific scenario and facts. However, it is not the
task of the reviewer to reappraise the assets, as the reviewer’s purpose is to make sure that
their audit client’s financial statements are materially correct. In the process of the review,
the reviewer may perform some “sensitivity testing,” which could include changing certain
key assumptions to test the magnitude (also known as the “materiality”) of the change.
Usually the review process takes considerable time. It is good practice to indicate in
the letter of engagement the amount of time to be dedicated to this review process and the
appraiser’s cost that will be attributable to the review efforts. This leads to fewer surprises
for the client and realistic expectations regarding the appraisal fees.
The following are examples of some questions the reviewer may ask:
• What were the steps performed to assure that the asset listing received tied
into the client’s general ledger as of the date of the acquisition?
• What is the date of the asset record utilized?
• If the date of the asset record does not match the acquisition date, please
provide a discussion of any adjustments made.
• Explain the methodology used to value any assets which had allocated costs.
• What is an estimated percentage (by fair value) of the assets that were valued
using the sales comparison approach and an estimated percentage (by fair
value) of the assets valued using the cost approach? If specific categories
were valued using a particular approach, please identify those categories and
the reasons for the approach utilized.
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• Of the assets valued using the cost approach, please estimate a percentage of
those assets where replacement cost new values were obtained from direct
versus indirect methods.
• Provide a comparison (by major classification) of the values showing historic
cost, NBV, and fair value.
• What cost index tables were utilized and what is the source of those trends
(as applicable)?
• What deprecation tables were utilized and what is the source of those depre-
ciation curves (as applicable)?
• Provide a schedule showing the normal useful lives utilized and the sources
for those normal useful lives.
• Provide an explanation of how assets that exceeded their normal useful lives
were treated.
• If functional and/or economic obsolescence factors were utilized, what meth-
odology was used to estimate these factors and provide any support for those
factors?
• Provide an explanation for any line items that were excluded from the analysis.
• Provide a sample of sales comparison data showing any applicable adjust-
ments and the reasoning for those adjustments.
• Provide the methodology and assumptions used in valuing leasehold
improvements.
• Provide a listing of any extraordinary assumptions.
• If any replacement cost new and/or market data was obtained from client
personnel, provide the procedures used to verify the reasonableness and ap-
propriateness of such data.
• Describe how idled and/or underutilized assets were valued.
• Are any assets scheduled to be idled or disposed of in the near future? If so,
how were these assets valued?
• How were operating and capital-leased assets valued?
The reviewer will be conducting an analysis that will require the appraiser perform-
ing the work to provide information that some appraisers may consider “off limits” or
proprietary in nature. The appraiser is not expected to divulge true proprietary information;
however, most of the data requested can be provided in a way that does not reveal that level
of detail. Also, if the appraiser cooperates and delivers the requested information, there is a
better rapport and a sense of trust built between the reviewer and the appraiser.
If a good work file is built for every project, the data should be (relatively) easy to
gather. Some things that may be found in a good project work file include:
• A signed copy of the official appraisal report, cross-referenced or indexed
• Any comparable sales data used
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• Cost index tables based on credible sources, adjusted by the appraiser, as

appropriate, to fit the subject property
• Obsolescence calculations (as applicable)
• Memos of discussions with dealers, etc.
• Critical correspondence
• Other memos (as needed)
• Field notes
• Data received from the client
Consider the review process akin to an audit. As long as things proceed smoothly,
the valuation follows USPAP and/or other applicable standards (e.g., IFRS 3, SFAS 157
[ASC 820], SFAS 144 [ASC 360]), all questions are answered within a reasonable time
frame, and the answers are consistent, the process should be uneventful.
One of the red flags that may be raised during a review is the definition of value. For
all financial reporting valuations, the values are to be expressed as a fair value. Based on
SFAS 157 (ASC 820), that value can be equivalent to FMV in Continued Use or FMV in
Exchange (as defined in the Glossary) depending on the highest and best use and the most
advantageous marketplace. However, the term used in the analysis and report is to be “fair
value.” Under SFAS 157 (ASC 820), the appraiser should clarify the value conclusion by
including a discussion of the highest and best use and the most advantageous marketplace
(including any assumptions made) in the appraisal report.
It is good appraisal practice to make sure that the valuation is internally consistent
and that all of the data is properly documented and archived in a project file. This al-
lows the answers to the reviewer’s questions to be consistent with the appraisal performed.
Inconsistencies within a report or in methodologies (either within a project or between
projects) tend to create more questions.
Some potential issues that can cause problems during a review include the following:
• The electronic files provided to the review appraiser are not the same ones
used for the final appraisal analysis and report.
• Failure on the part of the appraiser to perform certain due diligence or proper
research.
• Refusal by the appraiser to provide information because “it is the company’s
proprietary information.” The reviewing appraiser usually works for the same
client as the appraiser, and as such they should be allowed to see any of the in-
formation provided by the company. The review appraiser usually is covered
by any confidentiality agreement signed by the audit team.
• Applying 100 percent depreciation to assets that are still in use.
• Use of a life that is abnormally long or short without meaningful support.
• Application of excessive obsolescence factors without meaningful support.
• Not applying obsolescence factors when there is obvious obsolescence
present.
252
• Using the incorrect premise of value (e.g., valuing an operating asset at or-
derly liquidation value without meaningful support).
• Adding or subtracting installation to an operating asset without meaningful
support.
• Concluding different values for identical assets without meaningful support.
• Using different lives for identical assets without meaningful support.
• “Blindly” applying trend and depreciation factors to entire categories without
reviewing those categories for potentially misclassified assets (e.g., comput-
ers or machinery and tooling in the furniture category, computers in the ma-
chinery category, equipment in the building category).
• Using NBV as fair value without appropriate backup or justification.
Conclusion
Valuations for financial reporting can become a significant portion of a practicing
MTS appraiser’s portfolio. In order to perform these appraisals properly, the MTS appraiser
needs to understand and appropriately apply some additional standards. The intent of this
chapter is meant to be a brief introduction to the new standards for financial reporting. It is
recommended that the MTS appraiser obtain and review these standards in detail.
Summary
The new financial reporting standards require the MTS appraiser to perform ap-
praisals in a somewhat different manner than has been done in the past.
The new financial reporting standards require the MTS appraiser’s work product to
be reviewed and scrutinized in much greater detail than has been the practice in the past.
Key Points
• Any company (public or private) that follows GAAP or IFRS must perform a valu-
ation whenever a merger takes place or when a significant event occurs that may
impact the value of that company.
• The standards that will briefly be reviewed (as they apply to the MTS appraiser) are
the following:
○○ SFAS 141R: Business Combinations (Revised December 2007)
○○ SFAS 142 (ASC 350): Goodwill and Other Intangible Assets (ASC 350: In-
tangible—Goodwill and Other) (June 2001)
○○ SFAS 157 (ASC 820): Fair Value Measurements (ASC 820: Fair Value Mea-
surement and Disclosure) (September 2006)
○○ SFAS 144 (ASC 360): Accounting for the Impairment or Disposal of Long-
Lived Assets (ASC 360: Property, Plant, and Equipment) (August 2001)
• A summary of some of the pertinent concepts of SFAS 141R (ASC 805) that may
be meaningful to the MTS appraiser:
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○○ SFAS 141R (ASC 805) is broader than SFAS 141 in that it applies to all
transactions, whereas SFAS 141 only applied to those transactions concern-
ing combinations in which control was obtained by transferring consideration
(cash or cash equivalence).
○○ SFAS 141R (ASC 805) requires that all assets (including contingent liabilities
and assets) be recognized as of the acquisition date and at their fair value. The
“cost allocation” guidance stated in SFAS 141 resulted in the recognition of
certain assets at dates other than the acquisition date and at a value other than
fair value.
○○ SFAS 141R (ASC 805) requires that all acquisition-related costs (e.g., consult-
ing, legal fees, due diligence fees, appraisal fees) be accounted for as separate
expensed items, whereas SFAS 141 allowed the inclusion of these costs in the
acquisition price (and thus allowed them to be allocated among the assets).
○○ Under SFAS 141R (ASC 805), restructuring costs and other related costs are
to be recognized as separate expenses and not as a liability assumed as of the
acquisition date (as was the case with SFAS 141).
○○ In business combinations where the business combination is achieved in
stages, SFAS 141R (ASC 805) requires that the entire interest be recognized
as of the acquisition date. SFAS 141 allowed for the recognition of the fair
value of the assets and liabilities and of the associated goodwill at each step
of the transaction.
○○ Projects that involve IPR&D are to be valued at a fair value under SFAS 141R
(ASC 805) and should not be subject to depreciation expense until the project
is completed or abandoned. This is different from SFAS 141 in that SFAS 141
required that IPR&D assets be expensed.
• SFAS 157 (ASC 820) provides some guidance on what needs to be considered
when valuing assets under SFAS 141R (ASC 805), SFAS 142 (ASC 350), and
SFAS 144 (ASC 360). It also defines fair value, which is to be used as the value
premise in all other FASB-related statements. The definition of Fair Value is: “…
[T]he price that would be received for an asset or paid to transfer a liability in an
orderly transaction between marketplace participants at the measurement date.”19
• In estimating fair value, the reporting entity, and thus, the appraiser should identify
characteristics that identify general market participants. Specific market partici-
pants do not have to be identified. In other words, when valuing personal property
or machinery assets, the appraiser needs to consider what a typical knowledgeable
willing buyer would consider when buying the asset.
• SFAS 157 (ASC 820) further states that fair value assumes the acquired asset will
be used at its highest and best use which is defined as “….physically possible,
legally permissible, and financially feasible at the measurement date. In broad
terms, highest and best use refers to the use of an asset by market participants that
would maximize the value of the asset or the group of assets within which the asset
would be used. Highest and best use is determined based on the use of the asset by
254
market participants, even if the intended use of the asset by the reporting entity is
different.”20
• In the application of all of the valuation techniques, SFAS 157 (ASC 820) defines
two different types of inputs:
a. “Observable inputs are inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity.
b. Unobservable inputs are inputs that reflect the reporting entity’s own assump-
tions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances.”21
Notes
1
Applicable IASB standard for the MTS appraiser: IFRS 3: Business Combinations; Applicable IVSC Valuation Applications (IVA) and
GN: IVA 1: Valuation for Financial Reporting; GN3: Valuation of Plant and Equipment.
2
SFAS Statement 141 (revised 2007), Business Combinations, December 2007.
3
Ibid.
4
SFAS 141 (revised 2007), Business Combinations, December 2007.
5
Ibid.
6
Applicable IASB and IVSC standards for the MTS appraiser: At the current time, there is no applicable IFRS Standard comparable to
SFAS 157. The definition of fair value is covered in IFRS 3, International Valuation Standard (IVS) 1: Market Value Basis of Valuation
and IVS 2: Basis Other Than Market Value.
7
SFAS 157, Fair Value Measurement, Paragraph 5. (Paragraph 35-2 of ASC 820.)
8
SFAS 157, Fair Value Measurement, Paragraph 8. (Also reference paragraphs 35-5 to 35-8 of ASC 820.)
9
10
11
USPAP, The Appraisal Standards Board of the Appraisal Foundation, Washington, DC, effective January 1, 2008 through December
31, 2009, pages U-54 to U-58.
12
SFAS 157, Fair Value Measurement, Paragraph 21(a) and (b). (Also reference section 820-10-20 of ASC 820.)
13
As of the printing of this text, SFAS 157 (ASC 820) is just being implemented. There are ongoing discussions among those in the MTS
discipline as to what constitutes a Level 2 versus Level 3 input.
14
Applicable IASB Standard for the MTS Appraiser: IAS 36: Impairment of Assets. Applicable IVA and GN: IVA 1: Valuation for
Financial Reporting; GN3: Valuation of Plant and Equipment.
15
SFAS 142, Goodwill and Other Intangible Assets, Paragraph 21. (Also reference paragraph 35-15 of ASC.350.)
Applicable IASB standard for the plant and machinery appraiser: IFRS 5: Non-current Assets Held for Sale and Discontinued
16
Operation. Applicable IVA and GN: IVA 1: Valuation for Financial Reporting; GN3: Valuation of Plant and Equipment.
17
At the time this text was published, FASB sent out an exposure draft that would modify the requirements of SFAS 144 to exclude
the “…less the cost to sell” from the value premise. It is recommended that the reader obtain the latest version of SFAS 144 in order to
ascertain whether this change was adopted. For purposes of this text, the “…less the cost to sell” verbiage was left in because this was
the premise of value applicable at the time.
18
Caution: The appraiser must be careful that whatever information is disclosed does not in any way violate any of the confidentiality
requirements under USPAP. Prior to providing information to anyone, including the auditor, it always is good practice to obtain client
permission.
19
SFAS 157, Fair Value Measurement, Paragraph 5. (Paragraph 35-2 of ASC 820.)
20
SFAS 157, Fair Value Measurement, Paragraph 12. (Paragraphs 35-10 to 35-15 of ASC 820.)
21
SFAS 157, Fair Value Measurement, Paragraph 21(a) and (b). (Section 820-10-20 of ASC 820.)
255
10
Ethics
Objectives:
1. Define personal and business ethics.
2. Define appraisal ethics.
3. Explain USPAP.
4. Explain the American Society of Appraisers’ Principles of Appraisal
Practice and Code of Ethics.
This chapter begins with a discussion of personal and business ethics, but focuses
on the ethical procedures and standards that professional appraisers are expected to follow
in their appraisal assignments. It also provides guidance on the framework within which
professional appraisers can maintain their fiduciary responsibilities. The appraiser’s fidu-
ciary responsibility emanates from a relationship of trust, a relationship that is not neces-
sarily imposed by law. This chapter is not a philosophical presentation of ethical standards.
It is a listing of the specialized ethics that the professional appraiser is expected to follow.
The aspects of report writing as required and promulgated by the Appraisal Foun-
dation’s USPAP and ASA’s Principles of Appraisal Practice and Code of Ethics were dis-
cussed in the previous chapter. The basic ethics required by these bodies are covered here.
Professional appraisers conduct their practices in compliance with USPAP. ASA is one of
the original sponsoring organizations of the Appraisal Foundation and has adopted USPAP.
All ASA members must conform to USPAP.1
Personal and Business Ethics

Merriam-Webster’s Online Dictionary defines ethics as “a set of moral issues or
aspects (as rightness).” It further indicates that moral “implies conformity to established
sanctioned codes or accepted notions of right and wrong,” while ethical “may suggest the
involvement of more difficult or subtle questions of rightness, fairness, or equity.” Ethics
and morals often are used synonymously, but there is a difference: in general, morality
refers to the rules and standards of conduct of a specific society at a certain time and place,
whereas ethics usually refers to the rules and norms of specific kinds of conduct or the
codes of conduct for specialized groups.
In everyday life, rules of conduct dictate what is right or wrong in many situations.
The same relationship does not always legally apply. Note, however, that what is legal is
not necessarily ethical, and what is unlawful is not necessarily unethical. For example,
driving 65 miles per hour where the speed limit is 55 miles per hour is not unethical, but it
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Ethics
is illegal. Although it is not illegal in some jurisdictions for a psychiatrist to initiate a social
relationship with a patient, it is certainly unethical.
Since business activity is controlled by many laws, it could be argued that any-
thing that is legal is necessarily ethical. The profit motive in business, however, is a strong
stimulus that adds to the ethical confusion and dilemma. The Ethics Resource Center, in
Washington, D.C., in 1994 conducted a survey of approximately 4,000 individuals from
various companies. Many of those surveyed said that when their company had to make
a choice between doing what was right and making a profit, the profit choice was made
most of the time. Nearly one-third of the employees surveyed sometimes felt pressured to
engage in misconduct, and at least occasionally ignored ethical standards to meet business
objectives. For the professional appraiser, this compromise is not an alternative; ethical
standards are paramount.
The hypothetical appraisal case that follows illustrates some of the differences
between typical business practices and the specialized nature of appraisal ethics. The re-
mainder of the chapter deals with ethical issues.
Hypothetical Appraisal Case

An appraiser, knowing the fee that a competing appraiser quoted, reduced
their fee quotation to a longtime client in an attempt to underbid the
competing appraiser. Nevertheless, the appraiser still lost the assignment.
The client was impressed with the names of the clients furnished by the
other appraiser and awarded the competing appraiser the assignment. The
appraiser that provided the underbid knew that the competing appraiser had
no experience with the type of property to be included in the appraisal.
The appraiser who completed the assignment later purchased some of the
property that had been appraised for the client.
What action, if any, should the unsuccessful appraiser take and what issues or prob-
lems may be involved in this hypothetical appraisal case? Consider this appraisal case from
an individual perspective and from a business perspective. The issues involved are
• Reduction of appraisal fees
• Disclosure of previous appraisal clients
• Inexperience
• Criticism of another appraiser
• Appraisal and subsequent purchase of the same property
Competition is a way of life in our society, and a price discount is not an issue of
personal or business ethics. Disclosure of past successes is a competitive tactic and is not
considered unethical in business. However, the appraiser should be careful that any disclo-
sure does not violate confidentiality requirements imposed by USPAP, ASA, or the client.
The appraiser’s inexperience could be a problem in a continuing business relationship but is
not necessarily an ethical issue. Criticism of another appraiser could be an ethical problem
for some individuals. The apparent conflict of interest seems to be the only real problem
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Ethics
from an individual’s perspective and possibly also from a business’s ethical perspective.
Nevertheless, all of these issues are of ethical concern for the professional appraiser.
Appraisal Ethics
The glossary of this text indicates that “an appraisal is often referred to as an unbi-
ased opinion of value of an identified property based upon the investigation and analysis of
pertinent data and the application of appropriate analytical techniques.” The two important
ethical terms in the definition are an unbiased opinion and application of appropriate
analytical techniques.
An appraiser performing an appraisal cannot be an advocate. An advocate is biased.
Webster’s defines an advocate as “one that pleads another’s cause; of another….” Note
the apparent redundancy of an “appraiser performing an appraisal.” (A USPAP exception
on advocacy that explains this redundancy is discussed later in this chapter.) Although an
appraiser is hired and paid by the client, the appraiser cannot be an advocate of the client’s
cause. An appraiser is a professional who is duty bound to submit an unbiased opinion.
This duty is the appraiser’s fiduciary responsibility to both the client and to in-
tended users. Fiduciary means based on firm faith and connotes a relationship of trust. This
unbiased duty is essential to maintain appraising as a respected profession. An appraiser
cannot accept an assignment with special conditions dictated by the client that might bias
the appraisal. This proscription may seem to contradict the adage that the customer is
always right, but the rationale behind it becomes obvious when the purposes of the opinion
are considered. For example, MTS appraisals commonly are used for financial purposes;
in such cases, lending institutions are specified intended users to which the appraiser has a
fiduciary responsibility. Appraisers in some federally regulated transactions are governed
by the appraisal rules adopted by the federal financial institutions regulatory agencies in
August 1990 to comply with Title XI of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA). This law imposes a requirement on regulated institu-
tions that, “if an appraisal is prepared by a fee appraiser, the appraiser shall be directly
engaged by the regulated institution or its agent….”2 While this requirement is normally
applied to real property, many lending and leasing institutions have adopted similar poli-
cies as part of their internal requirements, effectively imposing the same rule on MTS
appraisers.
The appraiser is in the position of promoting and protecting a high level of public
trust in appraisal practice. This is accomplished by acting ethically, competently, and with-
out bias in the provision of appraisal services. The public trust is protected when appraisers
develop and communicate their analysis, opinions, and conclusions to intended users in a
manner that is both meaningful and not misleading.
The appraiser develops professional judgment through education, training, research,
study, practice, and experience. An appraiser must have the expertise and knowledge to
competently perform the assignment. This is addressed further under the sections on US-
PAP and ASA’s Principles of Appraisal Practice.
As a professional appraiser, consider the issues the hypothetical appraisal case rais-
es. The first two issues, “reduction of appraisal fees” and “disclosure of previous appraisal
clients,” are discussed in the following sections on USPAP and ASA. The “inexperience”
issue may be construed as an infraction of fiduciary responsibility under general appraisal
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Ethics
ethics. The “criticism of another appraiser” issue is questionable in a respected profession.

The “appraisal and subsequent purchase of the appraised property” issue is definitely an
ethical problem for any appraiser, because it raises the possibility of a self-serving appraisal
opinion. It also is questionable whether appraisers can render truly unbiased opinions about
value if they are also prospective purchasers. This problem, discussed in subsequent sec-
tions, is handled differently by USPAP and ASA. Many financial institutions do not permit
the appraiser to be a prospective buyer even if that future interest is revealed. Appraisers
who also wish to purchase the property being appraised may have to forgo the appraisal
assignment so as not to disqualify themselves as prospective purchasers.
The appraiser does not have the luxury of ethical compromise. Professional ap-
praisers must be willing to place personal interest second to the interest of the public whom
they serve. Ethical considerations must supersede economic considerations.
Uniform Standards of Professional Appraisal Practice

In 1986, the major appraisal societies formed an Ad Hoc Committee on Uniform
Standards, and that committee developed standards that became known as USPAP. ASA
was the only society involved that comprises appraisal disciplines other than real property.
In Appendix F of this text the Ad Hoc Committee, the Appraisal Foundation, the Appraiser
Qualifications Board (AQB), and the Appraisal Standards Board (ASB) are discussed. Ap-
praisers and users of appraisal services should have a copy of the current edition of USPAP,
a living document presently published biannually in even years. It is available from the
Appraisal Foundation (more information is available in the “Additional Reading” section
of this chapter).
ASB continually develops, amends, interprets, and publishes USPAP. Neither ASB
nor the Appraisal Foundation enforces USPAP. Rather, USPAP is enforced by peer review;
complaints are directed to the respective societies. A court of law often is the ultimate
ethics enforcer for the appraisal professional. The establishment and work of the Appraisal
Foundation have contributed to the evolution of appraisal from a trade to a profession.
USPAP specifically includes a Preamble, Definitions, Rules, Standards, and State-
ments. As discussed in Chapter 8 – Report Writing, Standards 7 and 8 of USPAP address
personal property appraisal development and reporting. Other parts of USPAP also apply
to personal property appraisers.
The word “misleading” is used again and again throughout USPAP. The first sen-
tence of Standard 8 states that an appraiser “must communicate each analysis, opinion,
and conclusion in a manner that is not misleading.”3 This concept continues to appear
throughout the ethics provision and the standards.
The ethics provision of the preamble initially reminds appraisers of their inherent
fiduciary responsibility. The conduct section further states that it is unethical to use or
communicate a misleading or fraudulent appraisal. An assignment based upon a hypotheti-
cal condition serves as an example of required disclosures. The fiduciary responsibility, a
professional relationship of trust, dictates an unbiased opinion.
The section on management addresses appraisal fees. It states that contingent fees
are unethical and that an appraisal fee cannot be predicated on the value reported. Even a
direction of value favoring the cause of the client cannot be reported. Many appraisal firms
insist upon payment in full before the release of any valuation conclusions. This procedure
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Ethics
ensures that the client has no influence on the values reported. The management section
also states that the payment of any fee or receipt of a thing of value for an appraisal assign-
ment must be disclosed.
Consider the “thing of value” issue in the preceding hypothetical case. If the ap-
praiser reduces a fee, then the appraiser is offering a thing of value that must be disclosed.
The comment in the management section clearly states that disclosure of fees, commis-
sions, or things of value connected to obtaining an assignment should appear in both the
certification and the letter of transmittal. The Appraisal Foundation publishes Frequently
Asked Questions (FAQs) to provide examples and assist appraisers with the interpreta-
tion and application of USPAP. Examples addressed in the FAQs of “things of value” that
should be disclosed include payment of a fee to be included on a bank’s “approved” list;
offering a discount or coupon to a new client in attempt to gain their business; and offering
discounted or reduced fees in exchange for a specified quantity of business. Competition is
an accepted fact in our society, but the professional appraiser has further obligations in the
competitive arena. It is conceivable that the initial negotiation may have some relevance
to a third party who is relying on the appraisal report. The “thing of value” issue does not
apply to a fee adjustment in response to a change in the scope of a project.
The neutrality of a professional appraiser is a requirement of all major appraisal
societies. An appraiser cannot be an advocate and must report an unbiased opinion. Yet
USPAP states an exception to this age-old principle in the management section of the ethics
provision. Remember the apparent redundancy of an “appraiser doing an appraisal.” The
contingent compensation and the advocacy restriction do not apply in consulting assign-
ments in which the appraiser would not reasonably be perceived as acting in a disinter-
ested manner or “...performing a service that requires impartiality.”
The exception on contingent compensation and advocacy does not apply to all
consulting services. Consulting is a part of appraisal practice. The Definition section of
USPAP defines appraisal consulting as “the act or process of developing an analysis, rec-
ommendation, or opinion to solve a problem, where an opinion of value is a component of
the analysis leading to the assignment results.”4 In a consulting assignment, all ethical con-
siderations apply except when it would be obvious to any third party that the appraiser is
not unbiased. The fact that the appraiser is not acting in a disinterested manner must be dis-
closed properly in the report. This exception is further covered in Standard 4, Real Property
Appraisal Consulting, Development, and Standard 5, Real Property Appraisal Consulting,
Reporting. MTS appraisers have a responsibility to conform with the preamble, definitions,
rules, statements, and a specific standard rule that is applicable to the assignment, such as
Standard 3 in conducting an appraisal review. However, Standards 4 and 5 are specifically
written for real property consulting, and the only way an MTS appraiser would be required
to conform to these rules is in conducting a real property consulting assignment.
The “disclosure of previous appraisal clients” issue in the hypothetical appraisal
case involves the confidentiality responsibility of an appraiser. USPAP states that “an ap-
praiser must protect the confidential nature of the appraiser-client relationship.”5 Factual
data or results of an assignment cannot be disclosed except to someone authorized by
the client, as required by law, or to a peer review committee. Confidentiality is funda-
mental to the appraiser-client relationship. In fact, appraisers are sometimes required to
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Ethics
sign confidentiality agreements. Revealing the names of past clients could be a breach of
confidentiality.
The USPAP necessity of revealing information to a peer review committee could
conflict with, but be superior to, an all-encompassing appraiser-client confidentiality agree-
ment. In addition, some of the market data obtained in an assignment may be useful in
future assignments. To hold all data obtained as confidential may be unreasonable. Clearly,
the result of an assignment is confidential, as is all information so specified by the client.
The client, however, must be informed of the appraiser’s responsibility to conform to all
USPAP requirements. Any confidentiality agreement must be worded so that the appraiser
can conform.
The inexperience issue in the hypothetical appraisal case is addressed in USPAP’s
competency provision (part of the Ethics Rule). An appraiser must have the knowledge
and experience to perform competently. It is important for the professional appraiser to
participate regularly in continuing education activities. All designated members of ASA
must successfully participate in the society’s mandatory reaccreditation program.
If an unfamiliar assignment is encountered, it is unethical for an appraiser to accept
or continue without applying the following three steps:
1. disclose the lack of knowledge and/or experience to the client before accept-
ing the assignment;
2. take all steps necessary or appropriate to complete the assignment compe-
tently; and
3. describe, in the report, the lack of knowledge and/or experience and the steps
taken to complete the assignment competently in the report.6
Lack of training, skill, and experience to perform competently may be offset by
study and research. If that is not possible or feasible, an association with another appraiser
or the retention of an expert may be considered. The client must be made aware of the lack
of expertise and concur with the steps taken. The unsuccessful appraiser in the hypothetical
appraisal case has no way of knowing if the successful appraiser handled the alleged inex-
perience in the assignment properly. The competitor may have disclosed their inexperience
to the client and correctly resolved the inexperience problem.
Appraisers should be conservative in estimating their own professional competency.
Appraisers are rarely impartial judges of their own competency, which often is judged by
others in hearing rooms or courtrooms. A wise rule is “If you have to ask whether you
need help, you probably do.”
The ethics and competency provisions permeate USPAP and apply to all appraisal
disciplines. These provisions include the standard rules, comments, statements on appraisal
standards, and advisory opinions. The importance of these provisions is underscored by the
certification required to be a part of all appraisal reports for all appraisal disciplines.
USPAP does not directly address the issue of “criticism of another appraiser” pre-
sented in the hypothetical case, but USPAP does continually refer to appraisers as pro-
fessionals. ASA does address this issue, and considers it unprofessional and unethical to
injure the professional reputation of another appraiser. This concept is discussed in the next
section, on ASA’s Principles of Appraisal Practice and Code of Ethics.
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Ethics
The last issue in the hypothetical case, “appraisal and subsequent purchase of the
same property,” is addressed by USPAP in the required certifications (Standards Rules
2-3, 3-3, 5-3, 6-8, 8-3, and 10-3). The certifications section requires that the appraiser sign
a statement to the effect that “I have no (or the specified) present or prospective interest
in the property that is the subject of this report, and I have no (or the specified) personal
interest with respect to the parties involved.”7 The “apparent” conflict of interest is permis-
sible according to USPAP if it is disclosed in the certification. Reflection of an appraiser’s
fiduciary responsibility is required to understand this apparent conflict. Third parties, who
may subsequently rely upon the appraisal, must be made aware of the appraiser’s interest
in the property so that they can assess for themselves the possible effect on the results.
The conduct section of the ethics provision requires that appraisers “...perform as-
signments with impartiality, objectivity, and independence, and without accommodation of
personal interests.”8 Therefore, appraisers should strive to ensure that their other activities,
such as also being a property broker or dealer, do not influence, or even appear to influence,
their objectivity as professional appraisers.
Principles of Appraisal Practice and Code of Ethics

Ethical practices and the conduct required of ASA members are defined in ASA’s
Principles of Appraisal Practice and Code of Ethics. In some respects, these requirements
are more stringent than the basic ethics required by USPAP. They define for ASA members
and users of appraisal services what competent and ethical practice is and characterize
certain practices as being unethical and unprofessional.
Regarding the issue of “criticism of another appraiser,” these standards state that
the ASA appraiser is obligated to protect the professional reputation of all appraisers.
Unethical conduct by an appraiser reflects not only upon that individual but also upon
all appraisers and all professional appraisal societies. Section 5.1 of ASA’s Principles of
Appraisal Practice and Code of Ethics states that “...it is unethical for an appraiser to in-
jure, or attempt to injure, by false or malicious statements or by innuendo the professional
reputation or prospects of any appraiser.” An ASA member has an obligation to report to
the society any violation of ASA’s Principles of Appraisal Practice and Code of Ethics. In
the hypothetical case, the appraiser cannot allege the incompetence of the competitor to the
client but must report any ethical violation to the society.
In addition, ASA deals with the obligation to give competent service (the “inexperi-
ence issue”) in much the same way that USPAP does. The appraiser must fully acquaint
the client with any limitations and associate with another appraiser who has the required
qualifications. Both ASA and USPAP extend the competency principle to advertising.
False, misleading, or exaggerated advertising of solicitation for assignments is
unethical according to USPAP. Section 7.7 of ASA’s Principles of Appraisal Practice and
Code of Ethics states that it is unethical to
a misrepresent in any way one’s connection or affiliation with ASA or any other
organization;
b misrepresent one’s background, education, training, or expertise;
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Ethics
c misrepresent services available or an appraiser’s prior or current service to

any client, or identify any client without the express written permission of
such client to be identified in advertising;
d represent, guarantee, or imply that a particular valuation or estimate of value
or result of an engagement will be tailored or adjusted to any particular use
or conclusion other than that an appraisal will be based upon an honest and
accurate adherence to the Principles of Appraisal Practice.9
Concerning the issue of “disclosure of previous clients” ASA is more direct and
restrictive on the appraiser’s confidentiality obligation than is USPAP. Section 4.1 of ASA’s
Principles of Appraisal Practice and Code of Ethics states that “the fact that an appraiser
has been employed to make an appraisal is a confidential matter.” The client may have valid
reasons for keeping the fact of employment of an appraiser as confidential. ASA continues
by stating that “...it is improper for the appraiser to disclose the fact of his engagement,
unless the client approves of the disclosure or clearly has no interest in keeping the fact of
the engagement confidential....”
Although USPAP allows for the possible necessity of revealing information to peer
review committees, ASA does not. Section 4.1 also states that “in the absence of an express
agreement to the contrary, the identifiable contents of an appraisal report are the property
of the appraiser’s client or employer and, ethically, cannot be submitted to any professional
society as evidence of professional qualifications, and cannot be published in any identifi-
able form without the client’s or employer’s consent.”
In its initial description of the objectives of appraisal work, ASA states that all
the principles of appraisal ethics stem from the central fact that the result is objective and
unrelated to the client’s wishes. This could not be stated more directly. An appraiser must
submit an unbiased opinion and not be an advocate in any way.
On advocacy, Section 7.5 of ASA’s Principles of Appraisal Practice and Code of
Ethics states that “if an appraiser...suppresses or minimizes any facts, data, or opinions,
which, if fully stated, might militate against the accomplishment of his client’s objective
or, if he adds any irrelevant data or unwarranted favorable opinions or places an improper
emphasis on any relevant facts for the purposes of aiding his client in accomplishing his
objective, he is, in the opinion of the Society, an advocate.” Advocacy adversely affects
the trust and confidence in professional appraisal practice. It is in direct conflict with an
appraiser’s fiduciary responsibility. It is unethical and unprofessional. Contingent fees and
percentage fees are also unethical and unprofessional.
The issue of the “appraisal and subsequent purchase of the same property” in the hy-
pothetical case is addressed directly by ASA in Section 7.3 under the rubric of disinterested
appraisals. The user of an appraisal in which the appraiser has a present or contemplated
future interest “...might well suspect that the report was biased and self-serving and, there-
fore, that the findings were invalid.” ASA declares this unethical and unprofessional with
the following exception: A full disclosure must be made by the appraiser before the fact,
and the appraisal report must disclose the nature and extent of the appraiser’s interest. This
disclosure correlates with the USPAP-required certification that the appraiser has no, or a
specified, interest. USPAP does not directly address this issue except in the certifications.
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Ethics
The issue of “reduction of appraisal fees” in the hypothetical case is not directly ad-
dressed in ASA’s Principles of Appraisal Practice and Code of Ethics. A connection might
be argued under the concept of contingency and percentage fees or disinterested appraisals.
Such a discussion, however, would be merely academic because the ASA appraiser must
adhere to USPAP as well. According to USPAP, such a situation must be disclosed in the
report.
The appraisal report section of the ASA’s Principles of Appraisal Practice and
Code of Ethics that pertains to USPAP reads as follows:
“A mandatory recertification statement is required in all appraisal reports
by ASA as detailed in Section 8.7. All designated members of ASA should
state in each report: “The American Society of Appraisers has a mandatory
reaccreditation program for all of its designated members. ‘I am’ or ‘I am
not’ in compliance with that program.”
ASA has three professional grades of membership: Accredited Member (AM), Ac-
credited Senior Appraiser (ASA), and Fellow (FASA). It is unethical for anyone to claim
or imply holding a higher degree of membership than has been attained.
As stated in Section 7.9 of ASA’s Principles of Appraisal Practice and Code of
Ethics, ASA takes disciplinary action against members for violations in the following
categories:
• deviations from good appraisal practice;
• failure to fulfill obligations and responsibilities;
• unprofessional conduct;
• unethical conduct;
• conviction of felonies and misdemeanors, especially involving honesty or
veracity; and
• any unlawful, illegal, or immoral conduct that would bring disrepute to the
appraisal profession or to ASA.
Key Points
• All ASA members must comply with the Society’s Principles of Appraisal Practice
and Code of Ethics, as well as USPAP as promulgated by the Appraisal Foundation.
• An appraisal is an unbiased opinion of value. All the principles of appraisal ethics
stem from the central fact that the result is objective and unrelated to the wishes of
the client or future actions of the appraiser. If an appraiser has any interest in the
property or parties involved, it must be properly disclosed in the report.
• Reduction of appraisal fees. In the hypothetical appraisal case, the appraiser pro-
posed a lower-than-normal fee but was not awarded the assignment. It is unethical
for an appraiser to reduce a fee quote below a known competitive fee quote after
an initial fee quote has been submitted without disclosing that this occurred. This
type of reduction in fee is considered a “thing of value” by USPAP and must be
disclosed.
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Ethics
• Disclosure of a previous appraisal. In the hypothetical appraisal case, the appraiser

won the job based on the use of previous clients as references. For the professional
appraiser, this violates the confidentiality that is vital to the appraiser-client profes-
sional relationship. This is decisively addressed by ASA: “The fact that an appraiser
has been employed to make an appraisal is a confidential matter.” Confidentiality
is also a rule of the ethics provision of USPAP and is further addressed in the state-
ment on appraisal standards number SMT-5. USPAP admits that this obligation is
neither absolute nor clearly understood. All information so specified by the client
is most certainly confidential under normal circumstances. Disclosure of former
clients as references is allowed if permission to do so has been granted.
• Inexperience. In the hypothetical appraisal case, the losing appraiser believed that
the winning appraiser had no direct experience. This presents a major problem for
the professional appraiser. Both ASA and USPAP address the appraiser’s obliga-
tion to give competent service. The appraiser must fully acquaint the client with
the limitation(s), associate with another capable party to be able to competently
perform the assignment, and disclose the steps taken in the appraisal report. These
steps are outlined in USPAP’s competency provision. The disclosure of knowledge
or inexperience is necessary to meet the requirements of the competency provision
and maintain public trust in the appraisal profession.
• Criticism of another appraiser. This issue, as presented in the hypothetical appraisal
case, deals with the question of whether the winning appraiser’s potentially unethi-
cal behavior should be reported. From an appraisal standpoint, unethical conduct
by one appraiser damages all in the profession; but one appraiser should not openly
criticize another appraiser. This in itself is unprofessional. Violations of conduct
should be filed with the appropriate society. ASA members have an obligation to
report violations.
• Appraisal and subsequent purchase of the same property. In the hypothetical ap-
praisal case, the winning appraiser subsequently purchased some of the property
that was the subject of the appraisal. Both ASA and USPAP recognize that this may
be acceptable in some instances. If an appraiser does have an interest in the subject
property, that interest must be fully disclosed in the report. This too is required
to maintain public trust in the appraisal profession and provide services that are
meaningful and not misleading.
• Advocacy. An appraiser cannot be an advocate by slanting an appraisal to accom-
modate the client’s desires and interests, with the exception of consulting assign-
ments in which the appraiser would not reasonably be perceived as acting disin-
terestedly. Appraisals should be meaningful to the client and not misleading. An
appraiser also has a fiduciary obligation. This is a relationship of trust toward the
client and intended users, who have the right to rely on the validity and objectivity
of the appraisal. This trust also extends to confidentiality of work performed. The
results of an assignment, unless otherwise specified by the client, are confidential.
• Contingency or percentage fees. Contingency or percentage fees charged by an
appraiser for appraisal services are unethical. In certain consulting assignments
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Ethics
in which advocacy is obvious, this admonition does not apply. An appraiser must
have the knowledge and experience to perform competently. The client must be
informed of any limitation(s); a remedy or association with a qualified appraiser
must be arranged; and full disclosure must be included in the report.
Additional Reading
The Appraisal Foundation. A Guide for Instructors Teaching USPAP Appraisal. Washing-
ton, DC: Appraisal Standards Board of the Appraisal Foundation. Updated biennially.
The Appraisal Foundation. Uniform Standards of Professional Appraisal Practice. Wash-
ington, DC: Appraisal Standards Board of the Appraisal Foundation. January 1, 2010 to
December 31, 2011. Updated biennially.
Boatright, John R. Ethics and the Conduct of Business. Englewood Cliffs, NJ: Prentice
Hall, 1993.
Goodell, Rebecca. Ethics in American Business: Policies, Programs, and Perceptions.
Washington, DC: Ethics Resource Center, 1994.
Principles of Appraisal Practice and Code of Ethics. Washington, DC: American Society
of Appraisers, 1994.
Rand, Ayn, and Leonard Peikoff, eds. The Voice of Reason. New York: Meridian, 1989.
Notes
1
The enforcement or use of USPAP is described in the Preamble (Uniform Standards of Professional Appraisal Practice, January 1, 2010
to December 31, 2011 edition, page U-6) as follows:
The purpose of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level
of public trust in appraisal practice by establishing requirements for appraisers. It is essential that appraisers develop and
communicate their analyses, opinions, and conclusions to intended users of their services in a manner that is meaningful and
not misleading.
The Appraisal Standards Board promulgates USPAP for both appraisers and users of appraisal services. The appraiser’s
responsibility is to protect the overall public trust and it is the importance of the role of the appraiser that places ethical
obligations on those who serve in this capacity. USPAP reflects the current standards of the appraisal profession.
USPAP does not establish who or which assignments must comply. Neither the Appraisal Foundation nor its Appraisal
Standards Board is a government entity with the power to make, judge, or enforce law. Compliance with USPAP is required
when either the service or the appraiser is obligated to comply by law or regulation, or by agreement with the client or
intended users. When not obligated, individuals may still choose to comply.
2
Uniform Standards of Professional Appraisal Practice (Washington, DC: Appraisal Standards Board of the Appraisal Foundation,
January 1, 2010 to December 31, 2011 edition), page A-87.
3
Ibid., p. U-61.
4
Ibid., p. U-1.
5
Ibid., p. U-8.
6
Ibid., p. U-11.
7
Ibid., p. U-68.
8
Ibid., p. U-7.
9
Principles of Appraisal Practice and Code of Ethics (Washington, DC: American Society of Appraisers, 1994), p. 9.
266
11
Leasing
Objectives:
1. Define important leasing terms.
2. Summarize the history of leasing.
3. Explain the four basic types of lease structures.
4. Discuss the role of appraisals in leasing.
5. Introduce residual forecasting.
6. Introduce fair rental calculation.
Equipment leasing, as we know it today, is primarily a product of various tax and

accounting rules and practices that have evolved over the years. Leasing is a growing area
that sometimes requires professional appraisals to assist lessors, lessees, accountants and
lawyers with confirming lease structures and the value of assets being leased. The purpose
of this chapter is to provide a basic understanding of equipment leasing, its appraisal appli-
cations, commonly used leasing terminology, types of leases and lease structures, historical
information, residual forecasting, and fair rental value calculations.
Equipment leasing is a creative way to obtain the use of an asset without making a
sizable capital outlay to purchase it. In the business world, owning property is not usually
the objective; rather, the goal is to obtain the rights to use an asset to generate economic
benefits. The ability to use an asset to produce economic benefits is a fundamental element
of free enterprise.
All leases use either tax or accounting rules or a combination of both. The les-
see’s objectives of taking advantage of tax depreciation, removing assets from the balance
sheet, and obtaining the lowest implicit financing rate usually drive the selection of a lease
structure.
The evolution and growth of leasing is connected to the growth that has taken place
in free economies. It is interesting to note that leasing is currently becoming a fundamental
part of the economies of developing and former socialist countries.
Definition and Terms

Leasing versus Renting
The term leasing is often used interchangeably with the term renting. There is little
difference between the two terms other than the duration of the contract. A lease tends
to have a longer term than a rental. The rights of the lessee tend to be better detailed and
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Leasing
documented than the rights of a renter. A lease typically details various remedies and is
generally non-cancelable for the duration of a specified term.
For example, consider a 5-year lease that includes a cancellation penalty clause
stating that a breakage fee of 10% of the original asset value being leased would be as-
sessed along with all the remaining uncollected rents. Under a rental agreement, however,
normally no penalty clause is associated with the contract.
Lessee and Lessor

The lessee is the individual or company that is using, or has the rights to use, an
asset for a specified period of time in accordance with the terms and conditions of the lease.
The lessor is normally the legal owner who pays for the asset and permits the lessee to use
the asset in accordance with the lease contract.
Residual Value
Another term that is common to leasing is residual value, which is the value re-
maining after part of the asset’s life has been consumed. Depending on the particular lease
agreement, the term residual value can have slightly different meanings, which are dis-
cussed more completely in the residual forecasting section of this chapter.
History of Leasing
Leasing has been in existence, in one form or another, since the beginning of civili-
zation. Though the structures have changed over time, the basic concept of leasing remains
the same: the right to use an asset without purchasing it.
The earliest forms of leasing, dating back to about 1500 B.C., were relatively
straightforward and centered on ships or vessels used to enhance trade. These early leasing
structures were based on the premise that a portion of cargo would be given to the owner
of the vessel in return for its use. The owner would then sell that portion of the cargo to
obtain a return on his investment. This continued to be the main form of leasing until about
200 B.C., when the first ship charters were introduced. These charters permitted various
governments to obtain private ownership of ships for use in private commercial enterprise.
Ship charters continued for centuries as the dominant form of leasing. The only major
change that took place was that equipment types grew to include wagons, horses, and other
transportation-related equipment.
From the mid-1700s through the 1850s, the United States enacted laws relating to
bailments for hire, which is an archaic term for leasing personal property. These bailments
were the forerunners of modern-day leasing.
In the 1860s, the New York Plan was developed for financing railway rolling stock
and was the predecessor to equipment trust certificates. Trust certificates are documents
that show evidential ownership in the equity of property. The New York Plan was followed
by a more sophisticated version of trust certificate called the Philadelphia Plan. At this time
a tremendous change—industrialization—was occurring in the United States. The demand
for equipment was growing to such a point that new means of financing were needed. To
relieve the pressure on capital markets, laws and regulations were introduced to foster new
ways to raise capital and meet the demands of the expanding economic base.
In the 1880s, the Singer® Sewing Company wanted to help customers purchase
sewing machines. They introduced the first time-payment program, which is similar to
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Leasing
today’s conditional sales agreement: customers could purchase a sewing machine by pay-
ing a small deposit and making weekly payments. When the machine was paid off, the title
transferred to the customer.
Short-term leases for railcars were introduced in 1908, creating an alternative to the
traditional full payout leases. Full payout leases are leases whereby the full cost of the asset
is recovered during the lease term. Short-term leases rely on renewals of the lease term or
subsequent leases to another lessee to recover the cost and make the lessor whole. Short-
term leases were the predecessors of operating leases, which came about 20–30 years later.
Eventually operating leases expanded to include other types of assets.
In the 1920s and 1930s, machinery manufacturers dominated the leasing industry to
finance a market for the machinery they built, while at the same time attempting to control
the used equipment market. Then in the 1940s, the United States created the Lend-Lease
Act to supply the World War II allies with needed war equipment; the act allowed defense
contractors to write off the cost of the equipment purchases for the manufacture of defense
related equipment over the length of the defense contract. The act strengthened and legiti-
mized the role of leasing in the wartime economy and proved to be a foundation for future
laws dealing with leasing. This also helped legitimize leasing as an acceptable method of
financing capital equipment purchases.
In 1947 the Supreme Court established the cornerstone of leveraged leasing by
ruling in Crane v. Commissioner that an owner could include in his tax basis amounts bor-
rowed on a nonrecourse basis1 that were secured by the value of the property.
During the remainder of the 1940s and early 1950s, several rules defining the treat-
ment of leases were clarified and expanded. Accelerated depreciation was introduced, and
in the mid-1950s, Revenue Ruling 55-540 of the IRS provided rules differentiating a lease
from an installment sale. This ruling facilitated growth in air transportation and the car
rental industry.2
In 1955, the enactment of the National Banking Act permitted banks to broaden
their scope of business, thus allowing banks to enter the leasing arena. The year 1956
marked the passage of the Bank Holding Company Act, which permitted banks to establish
subsidiaries and allowed them to offer a wider range of services. This one ruling gave rise
to the establishment of many new bank leasing companies and further expanded leasing as
a method for financing capital equipment.
The Internal Revenue Act of 1962 liberalized depreciation guideline lives and cre-
ated a 7% Investment Tax Credit (ITC), which increased the benefits of asset ownership. In
1963, the Office of the Comptroller of the Currency further stimulated leasing by issuing
Interpretive Ruling 7.3400 (IRS IR 7.3400), which allowed banks to engage in the leasing
business.
Over the next several years, various IRS rulings affected leasing, rulings that further
defined depreciation, repealed the ITC, and then reinstated it. Leasing flourished when the
ITC was introduced and declined when it was temporarily rescinded. During this period,
financial institutions were asking for more specific guidelines concerning their leasing
activity. In 1974, the Federal Reserve Board issued regulations to provide guidelines for
bank holding companies and their nonbanking subsidiaries engaged in personal property
leasing.
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Leasing
In 1975 the ITC was raised from 7–10%; and the IRS issued Revenue Procedures
75-21 and 75-29, which clarified tax rules for leveraged lease transactions that constituted
true leases. These rulings, coupled with Revenue Ruling 76-30, formed the foundation of
current-day leasing. Revenue Ruling 76-30 restricted leases of special-use property and
further refined certain at-risk rules for leasing by individuals. These rulings are in place
today and govern the way asset leasing is performed in the United States. Subsequent IRS
rulings and Financial Standards Board statements have further clarified and expanded lease
structures. Currently the Financial Standards Board is in the process or performing a major
overhaul of the existing accounting rules to further clarify and modify existing rules as well
as standardizing accounting rules between the Generally Accepted Accounting Practices
(GAAP) and the International Accounting Standards. This is being driven by economy
becoming an international in scope and no longer isolated as it has been.
Present-Day Leasing
In 2009 the Equipment Leasing Association of America (ELA) (now the Equipment
Leasing and Financing, ELFA) reported that more than $400 billion worth of equipment
was leased and that leasing had become the most common form of financing used by in-
dustry for modernization and expansion.3 The ELA also reported that the leasing industry
is continuing to grow at an annual rate of about 10%. This rate of growth was maintained
even during the late 1980s following the permanent repeal of the ITC in 1987 and dur-
ing the U.S. recession of the early 1990s. When the ITC was eliminated, many in the
leasing industry initially believed that leasing would be substantially affected and might
even disappear. Leasing did not disappear, although a great deal of consolidation occurred,
resulting in stronger, more established leasing companies. With the Investment Tax Credit
being eliminated, the leasing industry developed different forms of financing equipment
through various increasingly more complex lease structures to meet the demand for equip-
ment financing. As the economy recovered from the recession, the leasing industry grew
even faster.
The collapse of several major companies in the early 2000s resulted in major focus
being placed on the accounting and leasing practices used to keep financial obligations
off corporate balance sheets. Some companies, it was found, had been using accounting
practices to hide lease obligations and thus obscure the financial soundness of the company.
These problematic lease transactions were referred to as “off-balance-sheet-financings” or
“synthetic leases.” The basic purpose of these leases was to remove assets and liabilities
from balance sheets, and thereby provide a better financial picture than was actually the
case. When several multibillion-dollar companies collapsed, resulting in huge losses for
stockholders, the Securities and Exchange Commission was brought in to review the Fi-
nancial Accounting Standards Board’s regulations and accounting practices. The result was
a major change in the rules in structuring “synthetic leases” with the introduction of FIN 45
and FIN 46. These two rulings mandated additional tests be performed to determine where
a lease qualified as off-balance-sheet and how much of the outstanding obligation needed
to be reported. These rulings had a major impact on the leasing companies as well as on
the lessees, since these rules made structuring synthetic leases much more expensive and
difficult. Synthetic leases are still allowed and used; however, given the complexity and
cost, many companies are using other forms of leases instead. Also the stigma associated
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Leasing
with the problematic off-balance-sheet-financing structures, many lessees are reluctant to

use this form of financing.
During the same period, the U.S. economy was in a recession after the “dot.com”
bust. Because of the recession and the increase in tax-based foreign investment, the Inter-
nal Revenue Service intensified its review of tax shelters for U.S. tax paying companies
investing in off-shore operations, while getting U.S. tax benefits. This review led to the
change or clarification of some of the existing tax rulings, which resulted in certain lease
structures being ruled against. These lease structures included what were referred to as
LILOs and SILOs. In both structures it was a matter of form over substance, meaning the
lessor was not in an at-risk position required by the IRS Rulings, and thus could not claim
depreciation or tax benefits. The final ruling basically stated that the structure must meet
a substance test and not only meet the form requirement. Today the leasing industry is go-
ing through a period of redefining itself. The new regulations—Sarbanes-Oxley and Basel
II—have forced some of the existing off-balance-sheet financings to disappear since the fi-
nancial statements must now have the chief operating officer (COO) and the chief financial
officer (CFO) of a company sign them. Many at the top level do not fully understand these
structures and thus, the current trend is to go back to the old basic structures. However,
if history repeats itself, some new, exotic variations of lease structures will again surface
sometime in the future. The demand for financing of capital equipment will continue.
The leasing industry has currently returned to the basic lease structures that have
been in existence for years. It is expected that even with the current industry activity
setbacks that the industry will continue to grow and, as the economy continues to grow,
leasing will remain the preferred method of financing. This trend is validated by the cur-
rent increasing demand for leasing, not only by the industrialized free economies but also
by developing economies. As the developing economies grow, their need for acquiring
equipment will be met only through some form of lease financing, since they will not have
the capital necessary to meet their expansion requirements. Many of the former Eastern
Bloc countries and emerging economies are already seeing leasing growth in double dig-
its, which usually begins with the transportation sector and gradually expands into the
manufacturing sector. These governments are looking to the Western world for guidance in
structuring their financial policies to foster the growth of leasing. It is expected that leasing
will continue to grow internationally and various new structures will develop depending
on the financial needs. It is likely that governmental legislation governing leasing will
facilitate that growth.
Lease Structures
There are basically only four traditional lease structures:
• true lease (tax lease or operating lease),
• conditional sales agreement (CSA) or lease intended as security (LIS),
• terminal rate adjustment clause (TRAC) lease, and
• leveraged lease.
These all have one fundamental thing in common: they are contracts obligating the
user of the asset (the lessee) to pay the legal owner (the lessor) for the right to use the asset
during the lease term. These lease structures differ in the manner in which the rights of
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Leasing
ownership are allocated between the parties. Under all lease structures, the lessor conveys
all the bundle of rights of ownership to the lessee, except for the ones specifically carved
out and retained by the lessor as spelled out in the lease agreement.
True Lease
A true lease is the most commonly used type of lease. It is also sometimes called an
operating lease, conforming lease, tax lease, genuine lease, or just plain lease. A true lease
is one in which the lessor is the legal owner holding title to the asset being leased; as such,
the lessor has the rights and benefits of ownership for tax purposes. The lessee, on the other
hand, has the rights to the asset that the lessor conveys through the lease. Interpretations
of various IRS rulings suggest that a lease transaction should meet the following criteria to
qualify as a true lease:
1. At the beginning of the lease term, the leased asset must have a projected fair
market value at the expiration of the lease term of an amount greater than
or equal to 20% of the value of the leased asset at the inception of the lease,
excluding from consideration the effect of inflation and/or deflation and any
cost to the lessor for removal.
2. The leased asset is projected to have the longer of (1) at least 20% of its
expected normal useful life (the life projected at the inception of the lease)
remaining at the end of the base lease term; or (2) a remaining normal useful
life of at least one year at the end of the base lease term.
3. The lessee cannot have a right to purchase or renew the leased asset for a price
that is less than its fair market value.
4. The lessor cannot have a right to force the lessee to purchase the leased asset
at a fixed price.
5. The lessor must have a minimum unconditional “at risk” investment equal to
at least 20% of the value of the leased asset at all times during the lease term.
6. The lessee must not furnish any part of the purchase price of the leased asset,
nor have loaned or guaranteed any indebtedness created in connection with
the acquisition of the leased asset by the lessor.
7. The lessor must show that the lease transaction was entered into for profit,
apart from any tax benefits resulting from the transaction.
If the proposed lease does not meet all of these conditions, it does not qualify as
a true lease. A true lease provides benefits to both the lessor and lessee, making it an at-
tractive form of leasing. The benefits are measured by both parties to determine the “all-in
costs” of a leasing transaction. By examining the benefits and costs, the lessee is able to
decide whether it is more prudent to lease or buy.
The lessee’s benefits can include the following:

• lower cost of funds,
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Leasing
• hedge against inflation,

• little or no initial cash outlay,
• off-balance-sheet treatment
• cash flow improvement,
• lease payments made from pretax earnings,
• level payments,
• no public disclosure,
• improvements on asset-to-earnings ratios, and
• the shift of risks associated with asset ownership, such as obsolescence, to
the lessor.
The lessor’s benefits include the following:
• retained tax benefits that can be sold to another party or retained to offset
earnings;
• a higher rate of return commensurate with the added risk;
• a diversified loan portfolio and, thus, a spreading of risk; and
• assets or portfolio that could be sold or traded if desired to improve the in-
come picture.
Conditional Sales Agreement

A conditional sales agreement is also referred to as a lease intended as security.
It differs from a true lease in that the asset is considered the lessee’s property. Essentially,
this type of lease is nothing more than a time-purchase contract. The lessee is the owner
of record for tax purposes and possesses all rights of ownership, just as if the lessee had
made a direct purchase. The primary advantage to the lessee is that the lessee does not incur
the full financial impact at the date of acquisition but does obtain the rights of ownership
for a minimal investment. For tax purposes, the lessee has the right to take all allowable
tax depreciation, although time payments are being made. This lease structure permits the
lessee to purchase the asset at the end of the term for a nominal amount. With this type of
lease, there is no discount in the interest rate offered to the lessee, because the lessor does
not retain any tax benefits; however, the difference between this type of lease and a loan
is that there is generally 100% financing, while a loan will have a loan-to-value limitation
similar to a down payment in a home loan. These types of structures are used when the
lessee can use tax benefits in the form of depreciation.
TRAC Lease
A lease with a terminal rate adjustment clause (TRAC). It is structured as a single-
investor lease and is restricted to licensed over-the-road vehicles. Congress created these
leases as a hybrid type of lease containing elements of both true leases and conditional
sales agreements to assist the transportation industry. The lessor is permitted to claim the
tax benefits of ownership, and the risks of ownership are shifted to the lessee.
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Leasing
With a TRAC lease, the last lease payment can be adjusted upward or downward
to make up for any difference between the originally estimated value of the vehicle upon
which the initial lease payments were based and the actual value of the vehicle at the end
of the lease term. If the value of the vehicle is higher than originally estimated, the lessee
and lessor may share the difference, or it may be credited solely to the lessee. If the value is
less than the original projected value, the lessee is required to compensate the lessor for the
shortfall. TRAC leases are popular with car and truck leasing companies, such as Hertz®
and Avis®, which lease vehicles from a lessor, such as an automobile manufacturer, then
lease them to their customers.
Leveraged Lease
A leveraged lease is conceptually the same as a single investor lease: the lessee
decides what equipment is needed and negotiates the terms and rates with the lessor in the
same manner. The lessee also negotiates other terms, such as use, maintenance, renewal,
return, and/or purchase options, as the lessee would do in a single investor lease. A single
investor lease, however, involves only two parties: the lessee and the lessor. In contrast,
a leveraged lease includes at least three parties: a lessee, a lessor, and a long-term debt
holder. This type of transaction is used for very large transactions, since documentation
is costly and normally will require several different tax counsels and auditors to properly
structure the transaction.
Usually several lessors and several debt holders are involved in a given transaction,
as well as a trustee who monitors each investor’s interests and distributes each party’s
share of the lease payment. The lessor in a leveraged lease becomes owner of the asset by
providing 20-50% of the necessary capital. The balance of the capital is borrowed from
institutional investors on a nonrecourse basis to the lessor. This loan is secured by a first
lien on the asset and the assignment of the lease and the lease rental payments.
The lessor in a leveraged lease can claim the tax benefits normally attributable to
ownership even though the lessor has provided less than 100% of the capital for the trans-
action. This is the “leverage” in a leveraged lease. This structure increases the tax benefits
and debt, but simultaneously increases the risk of the transaction and hence the rate. The
lessor in the transaction is paid off after the debt holder is paid off. If there are no proceeds
remaining after paying off the debt, the lessor who is in an equity position loses his invest-
ment. As has happened recently with the airline bankruptcies, the debt holder closed out the
lessor in many cases by taking the aircraft to satisfy the debt. The lessor, or equity holder,
would have had to pay off the debt to take control of the asset. But because the value of the
underlying asset was less than the outstanding debt, the equity holder would give up his or
her interest and go ahead and take the loss.
Off Balance Sheet Loans

In the late 1980s and early 1990s, another type of financing vehicle gained popular-
ity, the off balance sheet loan (OBSL). It is viewed as a true lease for financial accounting
purposes and a conditional sales agreement or loan for tax purposes. It is treated as a loan
for tax purposes with the lessee taking depreciation and carrying the asset on its books for
tax purposes. For financial accounting purposes, however, the assets are only footnoted and
thus are treated as leased assets.
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Leasing
In OBSL transactions, lessees have many of the same options that they would nor-
mally have in a true lease. The purchase price at the end of the term or at any early buyout
option (EBO) date cannot be a bargain purchase or less than fair market value of the assets.
This buyout amount is generally predetermined and as long as it is equal to or greater
than the underlying asset’s fair market value, the fixed price purchase option is acceptable
for the structure. OBSL transactions come in a variety of slightly different versions but
maintain two common elements: the lessor is at apparent risk and the lessee is offered the
option to purchase at the end of the term or at an EBO date for a fixed amount.
In more recent years, some major organizations abused the OBSL structure, which
had become an instrument where companies tried to find other techniques that accomplish
the same thing without having to set up special purpose entities to keep the financing off
balance sheet. New accounting rules such as FIN 45 and FIN 46 have emerged making it
much more difficult to structure such transactions and keep them off the lessee’s balance
sheet. The OBSL format is still permissible but it is used much less frequently than it was
in the past due to the stigma attached to it as a whole coupled with the complexity of the
documentation that makes it very expensive. Therefore, the number of OBSL financings
has dropped in total volume and these types of leases are now generally being done only
on major financings where the amount being financed is generally in excess of $50 million.
The benefit to the lessee of OBSL is that the financing is indicated as a pretax oper-
ating expense, thus improving the balance sheet from a liquidity standpoint. This appears
as an operating expense and does not appear as a long-term liability as would a true loan.
The Financial Accounting Standards Board (FASB) has been paying closer attention to this
structure from the standpoint that it may be misrepresenting the actual financial condition
of the lessee.
Appraisals for Leasing Purposes

Appraisals play a significant role in leasing. The choice of lease structure deter-
mines the function, purpose, and type of appraisal. It is important to have a basic under-
standing of the various lease structures. Appraisals not only support the lease structure at its
inception, but are frequently required at other times during the term of a lease. Therefore,
it is necessary to have a basic understanding of the three phases of the lease life cycle: the
structure phase, the lease period, and the end of lease. To properly perform the appraisal for
any lease transaction, the appraiser must obtain a copy of the lease agreement, especially
the use, maintenance, and return provision sections of the document. Without this, the
appraiser may perform an appraisal that does not meet the terms of the lease. It has to be
understood that when a lease is structured, both the lessee’s and the lessor’s lawyers draft
the documentation that, not only defines the value concept to be used, but also the other
terms and conditions that were contemplated and agreed to by both parties.
Structure Phase
The lease life cycle begins when a potential lessee requires additional assets and
needs to identify a method to finance the acquisition. This phase is referred to as the struc-
ture phase. Lessors are requested to provide proposals describing potential lease structures.
These proposals are reviewed, and one or more of the prospective lessors is asked
to provide a formal proposal. Assuming that the structure and pricing meet the lessee’s
objectives, a proposal is accepted. This acceptance is referred to as being mandated or
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Leasing
awarded. From this point until the closing or signing of the final lease documents, the lease
language is refined, values of the assets are reviewed, and final adjustments are made.
During the structure phase, the most common need for appraisal services is to de-
termine the expected normal useful life of the asset and to estimate residual values at the
expiration of the lease term. The IRS requires an appraisal to determine the asset’s residual
value. As previously mentioned, leased assets must satisfy the requirements of various IRS
regulations to qualify for leasing treatment for tax purposes. The lessor will often depend
on an appraiser to help determine whether the assets meet the following requirements:
• The asset must not be “limited use property,” that is, the asset must be able to
be used by parties other than the lessee.
• At the end of the lease term, the leased asset is projected to have a remaining
useful life equal to at least 20% of its remaining useful life at the inception of
the lease term or a remaining useful life of at least 1 year.
• The asset must have a residual value at the end of the lease term that is equal
to at least 20% of its value at the inception of the lease.
For sale/leaseback transactions, an appraisal is required to determine the asset’s
value at the time of the sale to the lessor. A projection of the residual value is also required.
In a sale/leaseback transaction, the lease structure depends on the value conclusions as well
as the accounting treatment of the transaction for the lessee.
For synthetic leases, such as OBSLs, an appraisal is needed not only to determine
the asset’s residual value but also to provide an estimate of the asset’s fair market value at
any early buyout (EBO) date or to project its value annually for the entire term of the lease.
This is required to help establish what a buyout price will be since any EBO must not be a
bargain purchase.
Lease Term
A lease term is the fixed, non-cancelable term of a lease. The lease term, also known
as the lease period, is used to define the period from the lease commencement date to the
lease expiration date. During the lease period, appraisals may be needed for a variety of
reasons: credit analysis, Financial Accounting Standards Board Statement 13 (FAS 13)
review, potential sale of the lease or residual position, or early lease termination. Each need
requires a different type of appraisal.
Appraisals performed for credit analysis generally require the asset to be valued
at fair market value, orderly liquidation value, forced liquidation value, or net realizable
value. The credit department of the financial institution needs to know what can be reason-
ably recovered from the sale of the asset; this information helps the department decide to
either sell or wait for better market conditions or restructure the agreement.
FAS 13 requires that leasing companies annually review the residual risk positions
of their leases. This rule states that if the future value of the asset drops below its booked
residual value, and the downturn is other than temporary, the leasing company must, in the
year it discovers the change, establish a reserve to offset the potential loss or write down
the asset value and take a loss in the period the loss was identified. This can have a signifi-
cant effect on earnings if the residual risk positions cannot be supported. Under Generally
Accepted Accounting Principles (GAAP) only the asset values can be written down and
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loss is taken from the earnings. Appraisals performed to establish residual values should be
consistent with the terms and conditions of the lease agreement and the definitions of value
contained therein. The reason for this requirement is to ascertain that the financial position
of the leasing company is properly reported.
A leasing company often buys or sells individual leases or lease portfolios either
to manage the company’s income or to adjust asset concentrations in its portfolio. These
transactions require appraisals to properly analyze the value of the assets. The purpose of
these valuations may be to determine a new residual or to do what is referred to as a mark
to market adjustment.4
An asset may also be sold when its value has increased. In this case, the new lessor
assumes a higher base, the selling company recognizes a gain, and the lessee receives a
better rate.
The appraiser should remember that real money changes hands in a leasing transac-
tion and that leasing is based on contracts. A leasing appraisal must be consistent with
the terms, definitions, and conditions in the lease. Performing an appraisal without an
understanding of the lease’s structure and terms can lead to erroneous value conclusions.
It is imperative that an appraiser obtain a copy of the lease agreement, or at the very least,
review the pertinent sections of the document before undertaking an appraisal assignment
involving a lease arrangement. In most lease documents all the terms, conditions, and defi-
nitions of value are generally well documented and spelled out. The difficulty is that no
two lease agreements are the same, even though they may be of the same general type: e.g.,
true lease, leveraged lease, etc. Each leasing company has its own general master lease
agreement that will be different from that of the competition.
End of Lease
A lease is a contract between the lessor and lessee. The lessor transfers certain
rights of ownership to the lessee by means of the lease contract. The lessee exercises those
rights for a prescribed period defined as the lease term. In some leases the legal owner
conveys all the rights of ownership to the lessee except those rights that are specifically
identified in the lease as “held back.”
At the end of the lease term, or in the event of a default, the rights of ownership
that were temporarily conveyed through the lease agreement to the lessee revert to the
legal owner of the asset. In many cases, however, this is not simply a return of the asset
to the lessor. In most true and leveraged leases, certain options are available to the lessee
at lease expiration or during the term of the lease. These options generally include some
or all considerations such as an early buyout, renewing the lease, purchasing the asset, or
simply returning the asset to the lessor. If there is an early buyout option, the amount of the
buyout is generally stated as either a dollar amount or as a percentage of original cost. In
some cases, an appraisal may be required if a clause in the lease indicates that the lessee
can purchase the equipment for the higher of the stated amount or the then current fair
market value, whichever is greater. The reason for this kind of statement is that according
to IRS guidelines, the lessee cannot have a bargain purchase, or the lease will be ruled as
nonconforming and will have to be restructured as a loan or lease intended as security. This
kind of situation becomes messy and costly to both the lessee and the lessor, because of the
tax depreciation recapture and related penalties. The renewal and purchase options gener-
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Leasing
ally trigger the need for an appraisal, again since under the IRS guidelines the purchase
price cannot be deemed to be a bargain.
Renewal Option
An option to renew the lease at the end of the initial lease term, a renewal option
permits the lessee to renew the lease for another prescribed period is known as a renewal
option. The rental for the renewal period is typically based on the asset’s then-current fair
rental value as defined in the lease. The typical definition of fair rental value is the price
that a willing and informed owner would accept for renting an asset to an informed and
willing renter in an arm’s-length transaction for a prescribed period of time. The lease may
outline several different renewal options, each for a different period of time and possibly
with a different basis of value and from providing a predetermined rental rate to one requir-
ing that the rental rate be determined. In many cases the lease agreement requires that an
appraiser determine the asset’s current fair rental value for the renewal term.
Purchase Option
An option to purchase lease property at the end of the lease term is known as the
purchase option. Most true leases provide a purchase option. This option permits the les-
see to purchase the asset at the expiration of the initial lease term. If chosen, the option
must be exercised in accordance with the terms and conditions of the lease. The terms and
conditions provide the definition of value used in the lease. Normally the purchase price
is based on the then current fair market value of the asset. Any appraisal that is done must
use a value premise that is consistent with the definition in the lease. For example, the lease
may define the purchase price as the fair market value of the asset installed at its present
location, or it may define it as the fair market value of the asset removed, crated, and ready
for shipment. In each case the term fair market value carries a slightly different notion
of value. To the lessor it could mean a gain or a loss on the whole lease transaction if the
valuation is made under the wrong premise of value.
IRS regulations require that if the lessee is given an option to purchase, at the end
of a true lease term, the lessee must be able to purchase the asset at a price based on its
then-current fair market value. Failure to meet this requirement could result in a ruling by
the IRS that the lease agreement was not a true lease, thereby requiring that the transaction
be reclassified a conditional sale, triggering tax penalties and requiring that the lease pay-
ments be recalculated.
Many leases define value in a way that differs, sometimes in important ways, from
the value concepts commonly used by appraisers (including the value concepts used in
this book). In appraisals for leasing purposes, the definitions of the lease take priority.
Therefore, it is essential that the appraisers read and understand the definitions of value
and other terms used in the lease. Failure to do so may result in an appraisal that reaches
inappropriate or erroneous conclusions.
Often at the end of the lease, the appraiser is asked to provide additional informa-
tion about the leased asset, including whether the asset was properly maintained. If the
appraiser finds the asset’s condition is lower than that required by the lease, the appraiser
must determine the cost of restoring the asset to the required condition. In other cases the
appraiser is asked to opine as to the remaining useful life of an asset since the limitation
within the lease is that an asset cannot be leased beyond 80% of its normal useful life.
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Residual Forecasting
Residual value projection is an important component in the structure of a lease, but
it is also one of the least understood concepts. Though residual forecasting is not an exact
science, the risks can be mitigated by using sound appraisal techniques along with sound
judgment. Essentially, the term residual value means the value remaining after some of the
asset’s normal useful life has been consumed. It can also refer to the value of the asset at
a defined future point in time. Though the future value is often defined as the future fair
market value, that’s not always the case. Again, it is important that the pertinent sections
of the lease document be reviewed prior to performing any valuation in connection with
a lease. It should be noted that leasing companies have different criteria regarding the
amount of risk they are willing to take, which is often a percentage of the anticipated future
value. In some cases, a lessor may take 80% of the anticipated future fair market value as
a residual position, while others may use the projected future orderly liquidation value as
the maximum risk position. The presentation here is to provide a basic understanding of the
thought process and factors to be considered when performing residual projections. There
is no one absolute method.
For leasing purposes, a good starting definition of residual value is the value of an
asset at the end of the lease term. Different leases may further define the term. For example,
one lease may define residual value as fair market value under a removal concept, that is,
the value of the asset properly removed, crated, and ready for shipment. Another lease may
define residual value as fair market value of the asset installed and ready to use. Yet another
lease may define residual value as the fair market value of the asset properly removed,
shipped, modified, and installed at another site. All of these definitions are acceptable and
may be found in lease documents.
Residual values are based on forecasts of future events. Like all forecasts of future
events, residual values are inherently somewhat speculative. Nevertheless, by applying
the proper techniques for obtaining, analyzing, and interpreting facts and data, the risk of
speculation can be minimized.
Residual values are a critical component of almost every lease structure. They are
especially critical to the lessor in the pricing phase of most tax-related lease transactions.
The primary objective of the lessor is to receive an adequate return-on-investment to com-
pensate for the cost of funds and the inherent risk associated with the lease transaction. In
many cases the stream of payments over the lease term will pay only for the amortization
of the asset cost and cost of funds, and the residual value represents payment for the risk.
At lease expiration, the lessor hopes to receive a reasonable value for the asset to earn a
reasonable return-on-investment. To help protect the future value or return-on-investment,
use, maintenance and return provisions are included in the lease document to help identify
the expected condition and basis of value of the asset.
Residual values are also required to determine compliance with IRS Ruling 55-540
and Revenue Procedure 75-21, which state that the asset (1) must have at least 20% of its
value (as of the inception of the lease) remaining at the end of the lease term, and (2) cannot
be leased beyond 80% of its normal useful life. Proper residual forecasting mitigates future
losses from overly aggressive residual value assumptions.
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Leasing
Factors Affecting Residual Value

Several factors affect residual value. These factors fall into three basic categories:
economic, asset-specific, and lease-specific. Each category should be analyzed alone and in
relation to the others. Residual forecasting is not an exact science, but it can be a manage-
able one if the following factors are properly considered.
Economic Factors
The performance of the general economy affects residual value. If the economy is
in a recession, the marketability of used assets is usually negatively affected. Projections
made during a recession could significantly underestimate future values, because most
secondary market data would be influenced by the existing recession. The opposite could
happen if projections are made during a boom economy. As history demonstrates, econo-
mies tend to run in cycles, which can be global, regional, national, or industry-specific.
Failure to understand or compensate for these dynamics can result in the forecasting of
inappropriate residual values.
To make this analysis, an appraiser must look at the historical trend of a specific
industry and the specific assets that are included in the lease transaction. For example,
historically the railcar market runs on about a 10-year cycle, meaning it seems that it takes
10 years for the industry to complete its run from peak to valley and vice versa. If someone
was making a 7-year residual forecast for assets in the rail industry, it would be neces-
sary to consider where the start and end of the lease are in relation to the rail equipment
cycle. Estimating as if currently in a down cycle when the equipment would be coming off
lease in an up cycle would give an erroneous answer. It would be necessary to take these
factors into consideration when projecting the future values, or the future values may be
understated enough to have the lessor lose the transaction to another firm willing to take a
greater risk.
Asset-Specific Factors
Asset-specific factors are those directly connected to the asset itself. These include
the manufacturer’s reputation, the popularity of the manufacturer as measured by its market
share, and the equipment brand or model. The manufacturer’s reputation has a significant
influence on the marketability of the asset in the used equipment market. If a manufacturer
has a reputation for building inferior products or does not maintain an adequate stock of
replacement parts, the marketability of that manufacturer’s products can be negatively af-
fected. The manufacturer’s market share indicates the acceptability of its products and the
desirability of ownership. If the manufacturer’s product represents only a small segment
of the market, the asset may have lower future values. Production levels also influence
residual values because the secondary market is affected by supply and demand. Access to
and location of secondary markets is another important factor in residual valuation. Other
questions to be answered may be: Where is the secondary market and how big is it? Is it a
localized market or an international one? How many used units trade annually?
In most leases, the asset funding typically includes both direct, “hard” costs and
indirect, “soft” costs. In leasing, direct costs are generally the actual equipment costs, add-
ons, and any tangible features. Indirect costs contribute value if the asset is installed, but
they do not exist if the asset is removed. Examples of indirect costs are freight, tax, instal-
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lation, operating licenses, and related items. In some financing arrangements, the legal and
structuring costs are also included in the financing. It is important to know this since these
are costs that typically cannot be recovered when the equipment is sold. Most financial
institutions have limitations as to how much soft or indirect cost they will finance in a given
transaction, so it is also important that the appraiser understands what is included in the
historical cost before using it as a basis for any further analysis.
Each industry has its own product cycle. Some industries undergo radical changes in
technology over a 5-year period, whereas others change little over 20 years. It is important
for the appraiser to understand where a particular industry was in a given cycle when the
lease originated and where in the cycle it may be when the lease terminates. For example,
in the 1960s computers had developmental cycles of about 10 years. Cycles continued to
become shorter until the 1980s when they reached about 7 years. Eventually manufacturers
realized they could not recover their research and development costs because consumers
were unwilling to buy new systems each year, with the result that the computer market now
operates on a 3–5 year cycle.
Other factors must be addressed when projecting residual value and failure to do
so could result in erroneous conclusions. Some of the factors to be considered include the
following:
• Is an operating license required to operate the asset and is it transferable?
• Are environmental issues or regulations pending that may affect future
marketability?
• What is the environment in which the asset will be used?
Lease-Specific Factors
Lease-specific factors are contractual in nature and inherent in the lease itself. The
sections of the lease providing lease-specific information are those relating to use and
maintenance, purchase and renewal, and returns.
The use and maintenance section of the lease details how the asset must be main-
tained and any restrictions imposed on its use. In many cases, the lease requires the lessee
to maintain the asset in accordance with the original manufacturer’s recommended stan-
dards and procedures. Other leases may state that the asset must be maintained to “prudent”
industry standards or may limit the annual number of hours the asset can be used.
The purchase and renewal section specifies
• how the purchase price is determined;
• the definition and premise of value;
• when the lessee must notify the lessor of the lessee’s intent to renew, purchase,
or return the equipment; and
• the details governing any storage period that may be necessary, which is usu-
ally provided at the lessee’s cost.
In addition, the return provision provides important directions as to how the asset
should be valued. For example, it may answer such questions as whether the lessee or
lessor will bear the cost of removal, whether any performance guaranties are included, or
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whether the asset has to meet certain performance specifications before it is returned. These
lease-specific factors all affect the future value of the asset.
Projecting Residual Value

There is no one correct method for projecting residual values. Currently several
different methods are used, including those based on historical transaction data and those
based on the anticipated income stream the assets are projected to produce.
Most residual forecasting is based on historical transaction data. Past performance
is a good guide to future performance as long as the appraiser understands the factors that
influence performance. Care must be exercised when using historical data; the data and its
relationship to the current set of circumstances must be understood.
Historical transaction data may be analyzed in two ways. The first is to compare
the historical data to current prices and develop ratios on the relationships. This method
assumes that the current economic conditions and other factors affecting value will remain
the same in the future. The second method adjusts current market information by removing
the effects of inflation over time and then comparing the used costs to the historical costs
to establish ratios. Once these relationships are determined and a matrix is produced, then
using this matrix it is possible to adjust the current and historical cost of used equipment to
when it was new. This method results in a constant dollar comparison of the cost new and
the cost used. By developing a series or a matrix of such relationships over time, anomalies
can be identified and researched further. The matrix can provide additional information,
such as
• asset life cycles,
• when new models are introduced and their effect on preceding models, and
• when in the life cycle the asset experiences its greatest loss in value according
to a graph of the asset’s declining value over time (decay curve).
The resulting projected value of the asset would either be expressed as a percentage
of the asset’s new cost at the end of the proposed term or stated in a dollar amount. Most
leasing companies deal in constant dollars when projecting residual values. The inflation,
if there is any, over time is viewed as a buffer for the uncertainty of the future.
Residual forecasting is not an exact science. As with all quantitative problems,
supportable conclusions can be reached if research is conducted and if relevant data are
collected and analyzed using proper techniques. Care must be taken in gathering and un-
derstanding the data. Data that are not understood are dangerous and can lead to inaccurate
projections.
In summary, there is no one method of residual forecasting that is correct. In an
ideal world, the appraiser would have access to all the necessary data and be able to verify
every used sale to make sure the age, condition, and related factors are consistent with what
is being expected through the lease documentation but, unfortunately, this is not possible.
It is important that the appraiser follow a logical and supportable path in doing residual
projections and, first and foremost, review the pertinent terms, conditions, and definitions
of value contained in the specific lease agreement.
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Leasing
Fair Rental Value Calculation

Fair rental value calculation, or estimation, is another area where appraisers are of-
ten called upon to assist a lessor. In many situations, the lease agreement specifically calls
for an appraiser to arrive at the fair rental value based on the definition of value provided in
the lease. The whole concept of fair rental value is to determine what a fair and equitable
rental payment would be for the use of an asset for a given period of time to enable the les-
sor to recover their investment and provide a reasonable payment structure for the lessee.
There are several factors that must be considered in making a fair rental value
calculation. First, it is necessary to understand the basics of finance and that a dollar today
is worth more than a dollar tomorrow and that this is the basis of present and future value
theory. Second, one must understand that an asset used over time has part of its life con-
sumed and this reduces its value since its remaining useful life has been reduced and thus,
when compared to a new asset, it would not be as desirable. There are other factors as well,
such as the risk associated with something happening to the asset while it is not under the
control of the lessor.
Some of these issues can be mitigated in whole or in part through the lease docu-
mentation and insurance. But some cannot be mitigated and thus place the lessor in an
at-risk position. As stated earlier, the idea of fair rental value is to determine what the
incremental payment stream would be over time to compensate for the risk taken.
An asset today would have a certain value as expressed in terms of money. At the
end of a prescribed period of time, during which the asset was out on rental or lease, it was
being used and part of its life was consumed. Therefore, its value (again in terms of money)
would be less than a new one and therefore has to be accounted for. This loss is appraisal
depreciation in the form of physical deterioration. In many instances there may also be
functional and economic obsolescence as well. All these need to be accounted for.
There are two factors that must be considered in doing a fair rental value calcula-
tion. The first is the loss in value over time and the second is that the money invested in the
asset is tied up for the period of the term in the rental agreement. In other words, the owner
of the asset will not be able to convert the asset into cash until some point in the future when
the equipment is returned. This is called an opportunity loss. The opportunity is that had
the owner/lessor not invested in purchasing the asset, he could have invested the amount
of money in some safe investment and received some agreeable return on that investment.
Therefore, to calculate what the fair rental rate should be, it is necessary to determine what
the opportunity loss would be for the period of time that the rental agreement is in place.
The opportunity loss is the percentage rate that the lessor or owner would earn from that
other investment. There are several ways to calculate the fair rental rate. The following are
the steps to demonstrate what needs to be done and how the basic mechanics work.
1. Determine the value of the asset today and also project into the future what
the value of the asset will be then.
2. Determine what the cost of the equipment would grow to at a specified rate
over the period of time.
3. Subtract the projected future fair market value of the equipment from the
future value of the total capital investment that has been calculated. This dif-
ference is the amount an investor or lessor will want to recover by the rental
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Leasing
payments. Therefore, the fair rental value would be determined by dividing

this number by the number of rental payments that will be made.
Example 1: Fair Rental Value

Given Information
Current Cost $1,200,000.00
Interest Rate 9%
Term 5 years
Definition of value is fair market value in place
Equipment appraisal value loss is 25% after 1 year, then at a rate of 10% per year
Payment is monthly in arrears for 5 years
(No special industry or credit risk premium is being considered)
Cost of Equipment $1,200,000.00
Loss in Value year 1 @ 25% -300,000.00
$900,000.00
Loss in Value year 2 @ 10% -90,000.00
$810,000.00
Loss in Value year 3@ 10% -81,000.00
$729,000.00
Loss in Value year 4 @10% -72,900.00
$656,100.00
Loss in Value year 5 @10% -65,610.00
Projected Residual Fair Market Value after 5 years $594,490.00
The present value of $1,200,000.00 (PV) in 5 years (n) at a rate of 9% (i) = a future
value of $1,846,348.75
Future anticipated equipment value or projected residual fair market value after 5
years = $590,490.00
Therefore, by subtracting $590,490.00 from $1,846,348.75=$1,255,858.75, or the

amount the investor wants to recover through payments.
Then by dividing $1,255,858.75 by 60, which is the number of payments, the

monthly fair rental value is determined to be $20,930.98
This example demonstrates the method of calculating fair rental value for a typical
transaction. In some cases the interest rate may also include an industry risk element as
well as company-specific risk. This would be accomplished the same as the calculation for
any discount rate.
The more traditional method fair rental value is calculated for leases are that the
lease payment is based in part on the outstanding balance and the interest rate is not just
a simple interest additive. The basic steps are similar to the example above to determine
the future fair market value. The instead of subtracting out the residual value (future fair
market value) the calculation is done solving for the payment over a 60 month period.
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Leasing
Example 2: Fair Rental Value

Given Information:
Current cost $1,200,000.00
Interest Rate 9%
Term 5 Years
Payment Monthly in Arrears
As in Example 1 the future fair market value of the property is estimated to be

$590,490.00
To determine the monthly lease payment you would calculate as follows:
Present Value is $1,200,000

Future Value is 590,490
Period converted to monthly 60
Interest rate 9% converted to monthly. 75
Solve for payment which equals: $32,738.95
The first example is a vary simplistic way to calculate and is used to demonstrate
that the owner not only has to recover the cost of his investment but also these other
elements as well such as the loss in value that occurs over time and the opportunity loss
suffered.
The reader is advised to refer to Chapter 5: Income Approach for additional discus-
sion regarding present value, future value, and discount rate.
Key Points
• Equipment leasing is a creative way to obtain the use of an asset without making
what can be a sizeable capital outlay to purchase it. In the business world, owning
property is not usually the objective; rather, the goal is to obtain the rights to use an
asset to generate economic benefits. The ability to use an asset to produce economic
benefits is a fundamental element of free enterprise.
• All leases use either tax or accounting rules or a combination of both. The les-
see’s objectives of taking advantage of tax depreciation, removing assets from the
balance sheet, and obtaining the lowest implicit financing rate usually drive the
selection of a lease structure.
• The lessee is the individual or company that is using, or has the rights to use, an
asset for a specified period of time in accordance with the terms and conditions of
the lease. The lessor is normally the legal owner who pays for the asset and permits
the lessee to use the asset in accordance with the lease contract.
• Leases are usually based upon one of the following four lease structures: true lease,
conditional sales agreement, TRAC lease, and leveraged lease. These all have one
fundamental thing in common: they are contracts obligating the user of the asset, or
lessee, to pay the legal owner, or lessor, for the right to use the asset during the lease
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Leasing
term. These lease structures differ in the manner in which the rights of ownership
are allocated between the parties.
• Many leases define value and other terms in ways that differ, sometimes in impor-
tant respects, from the value concepts commonly used by appraisers (including the
value concepts used in this book). In appraisals for leasing purposes, the definitions
of the lease take priority over other definitions. Therefore, the appraiser must read
and understand the definitions of value and other terms that are used in the lease.
Failure to do so may result in an appraisal that reaches inappropriate or erroneous
conclusions.
• For leasing purposes, a good starting definition of residual value is the value of an
asset at the end of the lease term. Different leases, however, often further define the
term in ways that are essential for the appraiser to understand.
• Residual values are based on forecasts of future events. Like all forecasts of future
events, forecasting residual value is inherently somewhat speculative. Neverthe-
less, by applying the proper techniques for obtaining, analyzing, and interpreting
facts and data, the risk of speculation can be minimized.
• Several factors affect residual values. These can be grouped into three categories:
economic, asset-specific, and lease-specific.
• There is no one correct method for projecting residual values. Currently several
different methods are in use, but historical transaction data are the foundation for
most residual forecasting.
• Residual forecasting is not an exact science. As with all quantitative problems, sup-
portable conclusions can be reached if research is conducted and relevant data are
collected and analyzed using proper techniques. Care must be taken in gathering
and understanding the data. Data that are not understood are dangerous and can
lead to inaccurate projections.
• A method for calculating fair rental value was described and calculated.
Additional Reading
Amembal, Sudhir P., and Terry A. Isom. The Handbook of Leasing; Techniques & Analysis.
New York: Petrocelli Books, 1982.
BankAmeriLease Companies. The Complete Guide to Leasing. San Francisco, CA: Bank
of America, NT&SA, 1987.
BankAmeriLease Companies. The Red Book of Leasing. San Francisco, CA: Bank of
America, NT&SA, 1985.
Contino, Richard M. Legal and Financial Aspects of Equipment Leasing Transactions.
Englewood Cliffs, NJ: Prentice Hall, 1979.
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Leasing
Notes
1
Nonrecourse debt is debt that is secured solely by the asset being leased; there is no secondary source of repayment.
2
Revenue Ruling 55-540; 1955-2 CB39.
3
Equipment Leasing Today (January 2004). Arlington, VA, Equipment Leasing Association.
4
Mark to Market is the process of revaluing the asset to its current market value. This is a requirement especially for equipment that is
taken back into inventory.
287
12
Inventory
Objectives:
1. Provide an overview of the inventory valuation process.
2. Discuss the difference between inventory value for accounting purposes

versus inventory value for appraisal purposes.
3. Discuss inventory valuation in the context of fair value appraisals for

financial reporting.
4. Discuss appraisals for lenders and the development of an exit strategy.
5. Set forth relative inventory valuation terms and definitions.
6. Provide a checklist of or guide to information typically needed for an

inventory appraisal.
This chapter is offered as an introduction to the inventory valuation process rather

than a “how-to” inventory appraisal guide. As such, it represents an overview of the in-
ventory appraisal process. The appraiser must seek additional education and experience
regarding market analysis, depreciation, income/expense analysis, and other factors that
may impact the value of a subject inventory.
Inventory appraisal entails a broad and diverse potential group of subject proper-
ties. This is because virtually anything can be inventory. Consider the automobile that you
drive. Its components include steel, plastic, fabric or leather, electrical items, and glass.
Each of these items has gone through some form of manufacturing or conversion process
before it was assembled into the final automobile. At various points along the way these
items were inventory to the various owners. Steel may have started as scrap purchased by
the steel mill from a scrap dealer. The scrap was considered a finished good of the scrap
dealer, and upon receipt, a raw material to the steel mill. After processing, a coil of steel
then became a finished good of the steel mill and was subsequently sold to a manufacturer
for whom the steel was again a raw material. Depending upon the distribution stages and
specific functions performed, this continuing evolution of the steel as a raw material to one
user and a finished good to another may repeat several more times before the actual vehicle
is finished. The same lineage applies to the other vehicle components.
Upon completion, the vehicle as a whole is then sold to a dealer, moving from a fin-
ished good of the automaker to inventory available for sale by the dealer. Once sold to the
consumer, the vehicle ceases to be an inventory item and becomes an asset of the owner. It
is easy to see that virtually any tangible item was at some point considered to be inventory.
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There are various published definitions of inventory. Webster’s defines inventory as

1
“a list of goods on hand…[or] the quantity of goods or materials on hand.” This diction-
ary also makes a reference to stock, which is defined as “a store or supply accumulated;
2
especially: the inventory of goods of a merchant or manufacturer.”
Inventory is also defined in Generally Accepted Accounting Principles (GAAP) as
“those items of tangible property which are held for sale in the normal course of business,
are in the process of being produced for such purpose, or are to be used in the production
3
of such items.”
The Uniform Commercial Code (9.109) (UCC) defines inventory as follows: “In-
ventory means goods, other than farm products, which…(B) are held by a person for sale
or lease or to be furnished under a contract of service; (C) are furnished by a person under
a contract of service; or (D) consist of raw materials, work-in-process (WIP), or materials
4
used or consumed in a business.”
Understanding that the various definition sources have different focuses and ap-
plications, the common thread among all of them is that inventory is an item that is either
available for sale or going to be converted into a salable item. For purposes of this chapter,
either the GAAP or UCC definition is relevant.
Uses of Inventory Appraisals

There are four primary uses of inventory appraisals, namely accounting or financial
reporting, appraisals for lenders, ad valorem tax, and litigation or bankruptcy.
Accounting or financial reporting applications for inventory appraisals include
purchase price allocation in the event of a merger or business combination. Inventory ap-
praisals also may be required as part of an audit or verification of the value of a company’s
assets. Regulatory acts passed by the U.S. Congress such as the Sarbanes-Oxley Act of
2002 have resulted in a heightened focus on market-based accounting and asset valuation
5
of publicly traded companies. This also has resulted in more in-depth inventory appraisals.
Since the prior (2005) edition of this text, there has been a substantial increase in
the appraisal of tangible property (including inventory) to meet the financial reporting
requirements set forth by the Financial Accounting Standards Board (FASB). The FASB
chapter (Chapter 9) of this text addresses machinery and equipment appraisals for this
purpose. This chapter provides additional information specific to inventory appraisals done
for this use.
Most asset-based loan transactions and various conventional loan agreements in-
clude an advance against inventory. In some cases this advance may be a function of the
liquidation value (forced or orderly) of the inventory; in others it may be a revolving line
of credit made on the credit of the borrower using the fair market value of the inventory.
Either may require an inventory appraisal. These appraisals may be performed in-house by
the lender or by a third-party appraiser.
Certain states tax businesses on their inventory in addition to their real and personal
property. If contesting this value, the taxpayer typically will need an inventory appraisal
on which to base an appeal. In the event of dispute or litigation, it also is possible that the
taxing authority will engage a third-party appraiser to perform an inventory appraisal.
Inventory appraisals may be required for federal bankruptcy proceedings or other
legal reasons. Appraisals for the bankruptcy court may be related to a pending divestiture
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Inventory
of inventory, sale of a business unit, or a corresponding relationship to inventory financing.

Other legal applications include the valuation of the inventory component of a business
as part of an overall business entity stemming from the equitable distribution of marital
property in a divorce, estate purposes, or a dispute between two parties involving the value
of a business.
The definition of value may be determined by the appraiser, or may be accepted
by the appraiser as requested by the client, as valid for the intended use of the appraisal.
Definitions of value for inventory are the same as those for machinery and equipment and
are addressed elsewhere in this text.
Information Requests, On-Site Methodology

The following information typically is required to perform an inventory appraisal
and usually is requested prior to the site visit:
1. Perpetual inventories downloaded in an acceptable electronic format. This
should include item or stock-keeping unit (SKU) number, description, class
or category (if applicable), quantity on hand, unit and extended cost, and some
measure of sales activity (i.e., units sold over the last 6, 12, or 18 months).
Obtaining an electronic file prior to arrival is recommended as it affords the
appraiser the opportunity to confirm that the file is usable and that the re-
quested information is included.
2. Documents or materials describing the company and its business or products.
These include such items as product brochures or catalogs, Form 10-K filings,
annual reports, loan solicitation packages, broker solicitation packages, and
offering memorandums.
3. Top 10 customers and dollar sales volumes for each.
4. Top 10 suppliers and dollar purchases for each.
5. Major competitors.
6. A narrative history of the company (if not provided as part of item number 2).
7. A narrative description of the overall market and the company’s relative posi-
tion or market share.
8. A summary of the perpetual inventory by location. Consigned or off-site in-
ventory should be specifically identified. Any summary also should indicate
cost totals by location.
9. Information regarding previous bulk sales of discontinued merchandise,
including invoices, buyer information, and other documentation, where
available.
10. A recapitulation of inventory reserves and a discussion of the reasons for
carrying these reserves.
11. A statement of the inventory cost method used.
12. If the inventory appraisal is for ad valorem tax purposes, a copy of the ap-
propriate tax forms or papers filed with the local tax authority.
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Inventory
13. A list of trade associations of which the company is a member or that are
germane to the industry.
14. If the inventory appraisal is of retail goods, historical markdowns by location
and/or inventory class.
15. In the case of a retrospective appraisal, it is critical that all information be as
of the effective date of value.
On-Site Data Gathering

Inspection of the subject inventory and the data collection process that is performed
at the company site(s) is a key step in the inventory valuation process. In virtually all cases,
company employees who deal with the inventory in terms of manufacturing, sales and
marketing, returns or repairs, raw material purchasing, and other such inventory-specific
areas typically are the most knowledgeable parties regarding the subject inventory. The
quality and quantity of information gathered by the appraiser at the company site is the
starting point for understanding the subject inventory and its value characteristics.
Before or after inspecting the inventory on a walk-through basis, the appraiser
should meet with an individual who fully understands the inventory report(s) furnished.
Interpretation of codes or classification numbers, SKUs, etc., used for the specific inven-
tory also may require interfacing with the computer systems or inventory control specialist.
Most of the important information that is gathered on site will be obtained during
the course of conversations with various parties that have varying areas of expertise. It is
suggested that the appraiser use the following list as a guide in obtaining this information
and refer to this or a similar list prior to leaving the site. The following list is divided into
what is obtained from physical inspection and verification and what can be learned through
conversations with various key personnel.
Information obtained from physical inspection and verification

1. Comparison of the descriptive information supplied to the actual physical
item to which it refers.
2. Verification that inventory or SKU quantities provided are reasonable. (Note:
this can only be done with real-time data).
3. Notation of inventory quality or condition.
4. Notation of method of stocking, including location references.
5. The ability to control access to the inventory in the event of a future sale from
the current site.
6. The ability to display and make the inventory available for inspection by pro-
spective purchasers in the event of a future sale from the current site.
7. In the event that perpetual records are not available or if a comparison is being
made to a dated physical inventory, some effort must be made to estimate the
current quantities on hand. This will typically require some assistance from
parties who were involved with the last physical inventory, or in the event no
records are available from which to estimate, the appraiser would need to put
forth a best effort. Estimating value without the benefit of detailed records via
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Inventory
a site inspection is extremely difficult and subject to significant variations.

This method should be used only as a last resort.
8. For a manufacturer’s inventory, the ability to note the physical breaks as in-
ventory moves from raw materials to WIP to finished goods.
9. Notation of whether obsolete inventory is physically separated on site.
10. Notation of inventory that appears to be inactive due to the presence of dust,
rust, or other indicators. An additional investigation regarding items with
these characteristics is warranted.
11. Identification of specialized or proprietary items.
Information obtained from discussions with key company personnel

1. Solicitation of general opinions from company personnel of active or inactive
items and obsolete inventory.
2. Identification of new products. Confirm their inclusion or exclusion in the
inventory records provided.
3. Discussion of any future plans that will affect inventory mix (e.g., new prod-
ucts or modification of existing products, entering new markets or discontinu-
ing existing products, changes in ordering or purchasing methods).
4. Computer-generated inventory reports that will assist in the valuation ob-
tained through meeting with appropriate parties. Examples include separate
reports identifying slow-moving or obsolete inventory, or separate reports for
new products or items recently introduced. Where possible, electronic copies
compatible with the appraiser’s systems also should be obtained to allow for
further sorting and analysis of the data.
5. Discussions of the company’s products and markets, in order to understand
the flow of goods and factors affecting marketability.
• Where applicable, discuss any patents, trademarks, licenses, manufactur-
ing rights, etc., that may not be transferable.
• Discuss return privileges (goods returned by customers of the subject
company), historical return levels, and methods of disposal used for the
returned goods. The company’s accounting policy in terms of reserves
taken against returns should also be addressed.
• Identify key or primary vendors.
6. Discussion with purchasing personnel of the potential for returning materials
to vendors. If the inventory appraisal is for a lender, returning goods to the
vendor would typically result in the reduction of an outstanding balance, not
in cash to the lender. Therefore, returning goods is seldom a viable option in
an appraisal for a lender.
• Discuss the company’s methods of selling or disposing of slow-moving
or obsolete inventory.
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Inventory
• Discuss with purchasing personnel purchases of slow-moving or obsolete

inventory or obsolete inventory obtained from other sources and the rela-
tive discounting involved.
• Determine if obsolete inventory is included in the inventory data pro-
vided. If yes, determine whether any adjustments already have been made
to the cost base.
• With regard to proprietary inventory, ask questions relating to possible
alternative uses. This would include information for potential buyers in
the event the inventory is later liquidated as a result of a product being
discontinued.
Work-In-Process
When WIP is allowed to be considered by the intended users and use of the apprais-
al, the appraiser should observe the WIP mix during the on-site inspection. Notes should
be made on its quality, completeness, and marketability. After that inspection, a discussion
should be held with company personnel relating to the percentage of inventory that may
be WIP or, if available, a review of the supplied information relative to WIP. In addition,
the feasibility of completing the WIP should be considered from a time/cost perspective. In
the event of such an analysis, the appraiser should find the “percent complete” and/or time
required to finish the existing WIP.
Sample Counting
Sample counting entails a random selection of various inventory items for which
quantities on hand can be verified against company records. As the appraiser is typically
relying on the company-provided records, sample counting is optional. The result of a
successful sample counting exercise (i.e., all counts are accurate or any discrepancies can
be justified) is that the appraiser can state his or her belief that the information provided
by the company is reasonable. Conversely, if the records provided do not appear to be
accurate, this should be disclosed. If the inaccuracies are material to the valuation process,
then the appraiser should obtain more accurate data or isolate and adjust for the variances.
In some instances, an auditor’s report will contain information that is helpful in adjusting
the provided data.
Line-Item Testing
Line-item testing involves an analysis of specific SKUs or line items to ascertain
various factors, and may include the assignment of a value to each item. Line-item testing
can be used to determine the accuracy of the reported cost or to identify items from differ-
ent inventory categories that have similar value characteristics.
Line-item testing requires the appraiser to look closely at the characteristics of spe-
cific items, thus opening the door for additional observations or areas of investigation for
the inventory as a whole. Valuing a portion of line items within a given category provides
an indication of the value of the category as a whole. It is recommended that a sample
be made of each category. Emphasis should be placed on items of a significant unit or
extended cost, as these items most directly impact the inventory value as a whole.
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Inventory
Inventory Appraisals for Accounting or Financial Reporting

As previously noted, there has been an increase in recent years in appraisals for
accounting or financial reporting. Appraisals conducted for this use require an understand-
ing of, and must conform to, both the relevant Financial Accounting Standard (FAS) and
GAAP. In order to perform appraisals for accounting/financial reporting, such as purchase
price allocation, the appraiser must first understand the concept of the accounting principle
6
lower of cost or market (LCM). Generally speaking, the basis of inventory value for ac-
counting purposes is cost. As it pertains to inventory, cost includes the purchase price of the
given item plus the expenditures incurred in bringing the item to the point of sale or put-
ting it into salable condition. This might include transportation costs, insurance while the
good is in transit, and handling costs. In the case of a manufacturer, direct labor, allocable
overhead, and other such costs also would be part of the total inventory cost.
According to the Accounting Research Bulletin, LCM becomes important when
“…a departure from the cost basis of pricing the inventory is required when the utility of
the goods is no longer as great as its cost…where there is evidence that the utility of goods
7
will be less than cost…the difference should be recognized as a loss of the current period.”
In essence, LCM is intended to require a consideration of the market value of an
item, in the event of a declining market or presence of item(s) that have not been sold,
instead of simply carrying the original cost of the inventory forward. Further, in the event
of increasing costs, LCM does not allow for the “writing up” of inventory to its current
replacement cost.
It is important to note that the definition of inventory replacement cost for account-
ing purposes and as defined by GAAP differs from the definition of replacement cost that
is used as the starting point in applying the cost approach to value machinery and equip-
ment. The accounting definition is provided to demonstrate for the inventory appraiser the
difference between these two definitions as evidenced by the examples that follow. The
following definitions regarding inventory value are set forth by GAAP.
• Replacement Cost—The cost to reproduce an inventory item by purchase or
manufacture (In lower of cost or market computations, the term market means
8
replacement cost, subject to the ceiling and floor limitations.)
• Net realizable value—Selling price less reasonably estimable costs of comple-
9
tion and disposal.
The ceiling and floor limitations referenced above are relevant in that “market
means current replacement cost not to exceed a ceiling of net realizable value (selling
price less reasonably estimable costs of completion and disposal) nor below a floor of net
10
realizable value adjusted for a normal profit margin.”
In summary, inventory for accounting purposes cannot be valued above a realistic
selling price less adjustments for any cost of completion or disposal, and inventory cannot
be valued below this adjusted selling price less a normal profit margin.
The fact that accounting principles dictate LCM is important as this differs from the
application of the standard appraisal cost approach technique, where current replacement
cost new is the starting point from which all forms of depreciation are deducted. For ex-
ample, if three months ago a company purchased steel inventory at a cost of $150 per 100
pounds and its current cost is $165 per 100 pounds, then the inventory cost for accounting
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Inventory
purposes would be $150 per 100 pounds. In this same context, $165 per 100 pounds would
be the starting point for an appraisal cost approach analysis and, assuming no deterioration
or other obsolescence, the fair market value of the steel.
The importance of the LCM principle and the floor and ceiling impact of net realiz-
able value is in understanding that the reported cost should be investigated by the appraiser.
This is important in the event of accelerating markets where current cost exceeds original
cost. This also is applicable in the event of historical write-downs stemming from an in-
ability to sell the inventory at a profit.
GAAP also provides guidance for inventory values in the context of a business
merger or combination. Appraisals conducted for this use are typically done to allocate the
purchase price in such a transaction and also must meet the appropriate FAS requirement
(see Chapter 9). Such appraisals are done on the basis of fair value.
When determining the fair value of inventory in the context of a business merger or
combination, GAAP contains the following definitions:
• “Finished goods and merchandise inventories—Estimated selling prices less
the sum of the costs of disposal and a normal profit.
• Work-in-process—Estimated selling price less the sum of the costs of comple-
tion, costs of disposal, and a normal profit.
• Raw material inventories—Current replacement cost.”11
In reviewing GAAP guidance when this text went to press, it become obvious
that the definition of “normal profit” is key. Unfortunately, no such definition is provided.
Therefore, some discussion as to the interpretation and evolution of inventory value in the
context of “selling price less…a normal profit” is warranted.
In the context of the inventory of a manufacturing entity, the party who manu-
factured the finished goods likely has invested a substantial amount of time, energy, and
capital, and also has taken all associated risks to produce the finished goods. When this
inventory is sold through a business combination or merger, the seller (i.e., the original
manufacturer), is entitled to an amount in excess of the cost to produce the goods as it is the
party that has incurred all of the effort to date. This means that some portion of the profit
that ultimately will be realized on the sale of the finished goods must be identified through
the purchase price allocation and determination of fair value. Factors that are considered in
determining this portion include consideration of whether or not the finished goods are in
essence “sold” or if additional effort, risk, carrying costs, etc. will be necessary.
As an example, consider $1,000,000 (cost) of finished goods that has a normal
selling price of $1,500,000. It is accepted practice that, in the context of fair value for
purchase price allocation, the value of these goods is something greater than $1,000,000
and less than $1,500,000. This assumes that the inventory is relatively current and reason-
ably salable.
In order to take the discussion to the next level, assume that the goods are complete,
packaged, and ready to be shipped, and that the majority of the goods will be sold through
a purchase order or contractual agreement and will be shipped within 60–90 days. Finally,
assume that the remainder has recent sales volume that indicates a strong near-term demand
and very high probability of sale within the next 60–90 days, and that the normal terms
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Inventory
of sale for these goods include delivery or are “free on board” (FOB) to the customer’s
location.
Based on the GAAP guidance that the value of finished goods equals “[e]stimated
selling prices less the sum of the costs of disposal and a normal profit,” the starting point
of the valuation is the $1,500,000 selling price. From this amount freight charges would be
deducted. Also, the seller (who is actually the acquirer of the goods via a business merger
or combination) is entitled to a “normal profit” on the selling effort. As previously noted
by the assumptions, there is virtually no selling effort required therefore any profit allow-
ance would be minimal. The seller would be entitled to profit on the associated shipping
or warehouse functions required to place the goods on the truck and some return on the
carrying costs. These amounts could be estimated from the company’s historical expenses.
Assume that the sum of the costs associated with “selling” these goods, including a normal
profit for this effort is 5% of the $1,500,000 selling price, or $75,000. Therefore, the de-
rived fair market value is indicated by the amount of $1,500,000 minus the $75,000 which
equals a fair value of $1,425,000.
Now look at a different set of circumstances using the same $1,000,000 cost and
$1,500,000 selling price. Assume that less than half of the goods are tied to a purchase
order or contractual agreement, and based on recent sales history, it is likely to take 9–12
months to sell the finished goods inventory. The portion of the inventory (over 50%) that is
not tied to a purchase order or contract has been manufactured on the expectation of devel-
oping new markets for the product and a growing sales force. A final complicating factor
is that quality control has been an issue and the historical amount of goods returned equals
10% of gross sales. In most cases, the returned goods cannot be reworked or refurbished
and are simply disposed. These assumptions obviously paint a very different picture as to
what a “normal profit” would be on the effort required to sell the finished goods.
One immediate adjustment to be made in determining the fair value of the second
group of finished goods would be a reduction of 10% based on the historical returns.
Further, it is likely that there are some additional costs associated with receiving and pro-
cessing these returned goods. Developing new markets for the product and growing the
sales force constitutes a substantial effort to be expended by the seller. There also will be
greater holding costs due to the longer time frame over which the inventory will be sold.
Under these circumstances, it is reasonable to expect that the costs associated with selling
the goods plus a normal profit on this effort would be much higher than the 5% of selling
price in the previous example. For purposes of comparison, assume that the sum of the
cost plus a normal profit is 30% of the $1,500,000 selling price or $450,000, including the
adjustment for returned goods. Deducting this $450,000 from the $1,500,000 results in a
fair value of $1,050,000.
These examples illustrate some of the things that are considered in determining
the fair value of finished goods inventory for purchase price allocation appraisals. WIP is
valued in the same manner, in that the selling price is the starting point. In the case of WIP,
additional adjustments are required to cover the cost of finishing the goods in preparing
them for sale. There also may be an allowance or normal profit to the party for the effort
required to complete the manufacturing process, in addition to the associated selling effort.
Raw material inventory is the simplest inventory to value for purchase price al-
location, as value is equal to current cost of the material. Note that in this case the current
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Inventory
cost could be greater than or less than the cost of the material currently being retained. As
inventory value equals current cost, the LCM principle is not applied when valuing raw
material inventory for purchase price allocation.
Level of Trade
Another factor that can significantly affect the reported cost and value of inventory is
the level of trade at which the subject company does business.
Level of trade entails the various levels at which goods are bought and sold. Various
trade levels include the manufacturer, the wholesaler, and the retailer. Consumer purchases
from a retailer would typically be made with the intent of using the item instead of reselling
the item. Therefore, upon purchase by the consumer, the item becomes personal property
and is no longer inventory.
Using the example of manufacturer to wholesaler, wholesaler to retailer, and retailer
to consumer, Table 12.1 indicates changes in the cost of an item through the distribution
process.
Item A, manufactured at a cost of $100 per item, sold to

Manufacturer the wholesaler at a cost of $120 per item
Item A, costing $120 per item, sold to the retailer at a

Wholesaler cost of $135 per item
Item A, cost of $135 per item, sold to the consumer at

Retailer $199.99 per item
Purchases Item A at $199.99. The item becomes the

Consumer consumer’s personal property or asset, and no longer is
inventory.
Table 12.1. Changes in Item Cost through the Distribution Process
This example shows the changes in the cost of an item as it relates to the owner’s
level of trade. In terms of an inventory appraisal, the key point is whose inventory is be-
ing appraised. Is it the manufacturer’s inventory, which has the lowest cost base, or the
retailer’s inventory, which has the highest cost base? Other key considerations include
the premise of value for the appraisal and the intended users thereof. A final but equally
important consideration is the purchasing power of the parties involved. All of these factors
affect the value of inventory.
The driving factor in determining the appropriate level of trade is the premise of
value and intended use of the appraisal. As part of this, consideration must also be given to
the purchasing power of the owner or seller, and if an identified buyer exists, its purchasing
power. Level of trade, as it applies to inventory valuations, assumes that the purchaser has
the same buying opportunities as the seller. It also is noted that goods may be traded or
transferred at different levels.
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Inventory
In the prior fair value discussion, the significance of the level of trade is lessened,
as the starting point in determining value is the selling price, which would not be at the
same level of trade but instead at the next level of trade. However, the issue of level of
trade is still relevant in the case of a fair market value appraisal in which the inventory is
being sold but there is no business merger or combination and therefore no requirement
for allocation of purchase price. Consider an appraisal of Item A for which we previously
followed movement across the various levels of trade. If a fair market value appraisal of
the manufacturer’s inventory is being performed, then we would immediately look at the
$100 unit cost as a starting point of value.
The appraiser’s investigation may uncover various factors, such as absence of de-
mand for the item or profit margins that are less than industry norms, requiring a reduction
of the manufacturer’s cost to actual fair market value. It also is possible that, in the case of
improving or accelerating markets, excessive demand for Item A, or recent and significant
cost increases in the raw materials required to manufacture Item A, the manufacturer’s cost
of $100 is understated in terms of what the market would normally expect and, therefore
the fair market value would exceed the $100 stated cost.
Consider the inventory of a large or national manufacturer or wholesaler versus the
inventory of a small manufacturer or wholesaler operating on a local/regional basis. In valu-
ing the inventory of a national wholesaler, it is reasonable to expect that in most instances
the national wholesaler’s buying power exceeds that of an area or regional distributor of the
same goods. Accordingly, cost for the same item could be higher in the smaller company’s
inventory. This could be important in a fair market value appraisal, as the buyer is not likely
to pay more for an item that is readily available at a lower cost.
The difference in cost stemming from buying power also can impact value as a per-
centage of cost in a liquidation value appraisal. An example of this is that there are certain
price points at which bulk buyers purchase goods. If performing a liquidation value of the
inventory in which sales to these bulk buyers are anticipated, the amount the buyers would
pay doesn’t change, but value as a percent of cost would. This is a function of presenting
value as a percentage of cost.
Assume a hypothetical case involving women’s casual shoes where bulk buyers
regularly pay $1.00 per pair if there is a reasonable mix of sizes and colors. If the cost of the
subject inventory is $3.00 for a regional distributor but only $2.50 for a national distribu-
tor, then value as a percent of cost would increase from 33% (1.0 ÷ 3.0) for the regional
distributor to 40% (1.0 ÷ 2.5) for the national distributor. However, in each instance the
actual gross amount to be received is $1.00 per pair.
Retail Method of Accounting

A variety of methods are used to account for inventory. Some examples include
first in, first out (FIFO), which assumes that the first good purchased or produced is the
first good sold. The converse of FIFO is last in, first out (LIFO), which assumes that the
last good received or produced is the first sold. Either of these methods could result in
an inventory cost that differs from the actual inventory replacement cost, depending on
whether costs are increasing or decreasing.
One inventory costing method differs significantly from all others: the retail method,
in which inventory cost is reduced by the same ratio as the discounts stemming from sale
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Inventory
and closeout pricing on the retail floor. Because the discount from cost is not applied until
the point of sale (i.e., at the register) the inventory value of a given retailer is overstated
until the unrealized markdowns are accounted for in the retailer’s system. This becomes a
key consideration in valuing retail inventory regardless of the intended use of the appraisal.
In any market-based appraisal, the premise of willing buyer and willing seller dic-
tates that a willing buyer will not pay full cost for inventory that is going to be discounted at
the point of sale. The same situation applies in a liquidation value appraisal where an initial
adjustment to cost must be made for unrealized markdowns before additional liquidation
discounts are calculated. Typically retailers have historical data regarding discounts taken
at the point of sale, and this amount can be determined, subject to the inventory mix on the
retail floor and the specific date of value in relation to the seasonal aspect of many retail
goods.
There are a variety of methods, terms, and other concepts with which appraisers
should be familiar when performing appraisals for accounting or financial purposes. Fur-
ther, the comprehension of these concepts also is needed when performing appraisals for
other uses, as the appraiser first must understand the methods employed by the subject
company and its reported inventory cost. Some of these terms can be found at the end of
this chapter.
Ad Valorem Tax
At the time of publication of this text, approximately 17 U.S. states tax inventory
for ad valorem property tax purposes. The number of states levying this tax is subject to
change. As with any ad valorem–related appraisal, the definition of value and factors that
an appraiser should consider in valuing inventory can differ by state or jurisdiction. This
makes it extremely important for the appraiser to obtain the appropriate value definition
and related applicable appraiser’s guidelines.
Value as defined for ad valorem tax typically entails some premise of fair market
value or the typical willing buyer, willing seller aspect, at a particular level of trade as
discussed earlier in this chapter.
The inventory appraiser should become fully versed in the level of reporting or
standard for burden of proof that is required or expected for local ad valorem tax matters.
Another factor regarding appraisals for ad valorem tax uses is that they are typically
retrospective in nature. This is due to the process through which taxpayers typically render
information to the taxing authority about their various assets: provide information at the
beginning of a calendar year; receive a tax bill later in the year; and submit payment, typi-
cally due in the fourth quarter of the same calendar year. Further, in some instances, more
than 1 year of value is contested simultaneously. Retrospective appraisals of inventory are
no different from appraisers of other personal property in that the appraiser must conform
to USPAP requirements regarding retrospective appraisals.
Appraisals for Lenders

Inventory appraisals for use in a lending transaction are a significant market for
appraisal services. When an inventory appraisal is requested by a lender or borrower as
related to a loan transaction in which the subject inventory would be pledged as collateral,
orderly liquidation value is the most commonly requested premise of value. As defined in
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this text, orderly liquidation is the “estimated gross amount…with the seller being com-
pelled to sell….”
Noting that gross is a component of the orderly liquidation value definition, many
lenders are requesting both a gross and a net estimate of value. Net value typically entails a
deduction for the associated expenses of conducting and concluding an orderly liquidation
sale. Assuming the inventory will be sold from its existing location, some examples of such
expenses include rent or mortgage payments in order to maintain access to the facility,
utilities, insurance, and salaries for retaining key warehouse and/or sales personnel. In ad-
dition to these expenses that are generally company or site specific, the fees or commission
paid to the liquidator and related advertising and selling expenses also would be deducted
to arrive at a net value. Alternatively, a lender may accept the gross amount with a separate
discussion of the expected or suggested exit strategy, since the deductions to reach a net
amount may be more speculative than those in the gross amount.
An inventory appraisal for lenders of a manufacturing company typically will be
presented by the primary classifications of raw materials, WIP, and finished goods. Ad-
ditional detail for categories within the primary classifications also is appropriate.
Raw materials can be sold to other manufacturers in the same business or manu-
facturers using the same type of raw material. This could entail materials such as steel,
hardwood, and plastic resins. Brokers who handle these commodity-like items are potential
buyers and possible sources of information.
WIP historically has been a category that lenders exclude because, in the event of
default, WIP is not readily salable in its current state. However, there are an increasing
number of exceptions. In many manufacturing operations, raw materials are classified as
WIP once they are staged or designated for production, yet in their current state and prior
to any machining or modification, they are still raw materials and more easily sold as such.
Classifications and measurements of this type within the WIP category are part of the
inventory appraisal process.
In an orderly liquidation value inventory appraisal, the assumption typically is
made that the decision has been made to discontinue the business and the inventory will
be liquidated at the same time as the other business assets. Under this scenario, and in
the case of a manufacturing operation, raw materials would no longer be received and
the manufacturing process would be halted. In the event of a significant quantity of WIP,
alternative steps may be required; these will be addressed later in this chapter. In the case
of a wholesaler or distributor, no new inventory would be received.
A key component impacting both gross and net value is the time frame and disposi-
tion strategy to be used in selling the inventory. The time frame reflects consideration of
a variety of factors, including the quantity and mix of inventory on hand, inventory levels
in relation to historical or anticipated sales, access to the facility and markets, and the re-
quirements of the appraisal client or restrictions of the loan transaction. In most instances,
a three- to six-month period would reasonably constitute an orderly liquidation. As the
anticipated time period for liquidation can impact the appraised values, it is recommended
that the liquidation period be stated in the appraisal report.
The immediate sale connotations of a forced liquidation typically preclude the
provision of any terms or credit as part of the inventory liquidation. Under the premise
of orderly liquidation value, which offers a longer sales period, the provision of limited
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Inventory
terms may or may not be considered. Factors that would dictate the extension of any terms
include the normal arrangement under which goods are sold within the industry and the
subject company’s historic policies. This is important because in either an orderly or forced
liquidation scenario, a change in the normal sales terms could affect the price a potential
purchaser would pay or the quantity of goods to be sold to a given buyer.
In addition to factors that affect the value of inventory under other value concepts,
the appraiser must also keep in mind that value recovery in a liquidation is based on selling
the inventory of a failed entity over a limited time period and without the opportunity to
replenish or replace goods. This means that buyers may not receive any warranties or guar-
antees, and that orders may only be partially filled. In some cases, the business failure does
not necessarily mean that market acceptance of the product has declined or that the failure
was the result of decreased sales or product acceptance. One example of such a situation
is wholesalers or distributors who are simply buying and reselling goods. In this case the
goods may still be supported in terms of service or warranty by the original manufacturer
and are no different than the same items from another source.
Another key component of the valuation process is the anticipated disposition, or
exit strategy, that would be used. This strategy is also a function of the inventory quantity
and mix, anticipated demand, and time available for liquidation. At this point, it is impor-
tant to note that, unlike in a market-based valuation, inventory value can reflect sales that
cross levels of trade. For example, sales could be made to the next level of trade (i.e., exist-
ing customers), the same level of trade (i.e., direct competitors), and prior levels of trade
(i.e., the original manufacturer in the case of purchased goods or vendors and suppliers).
Consider a manufacturer of a consumer item that is sold to retailers and for which
there is broad market acceptance. Historically, warranty claims or product returns are ex-
tremely low (say, 1% ) and there are no seasonal issues affecting value. The exit strategy
for such a pool of inventory could entail sales initially to the existing customer base, most
likely at some discount from the normal selling price. This discount would be necessary to
entice existing customers to continue their normal purchasing patterns and also to provide
incentives resulting from the inability to completely fill all orders as a result of shortages
of some items. The offering or absence of payment terms also would impact the discount
required. Pending gross profit margins, sales made in the initial period would likely exceed
cost. Over time, increasing discounts would be offered to sustain momentum and maintain
the customer base. The time frame over which sales could be made to the existing customer
base is a function of the quantity and mix of inventory on hand and ability to continue to fill
orders. At the point upon which significant shortages or outages exist in the inventory and
orders are being only partially filled, customers who have already begun to look elsewhere
for similar goods would no longer have an interest in purchasing. Some of this reluctance
may be offset by yet additional discounts but for the most part the opportunity to sell to the
original customer base has passed.
The next phase of the liquidation sale requires a shift from the existing customer
base to alternative or bulk purchasers of distressed inventory. Sales in this manner would
be to a single or limited number of buyers and, depending upon the amount of inventory
remaining, would be of significant quantities of what is in essence “odd lots.”
From the point at which the sales focus shifts from the existing customer base to
bulk purchasers, the liquidation is winding down and the time period for completing sales
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Inventory
to bulk buyers typically would not exceed an additional 30–45 days. This is again a func-
tion of the quantity, and possibly location, of the inventory at that point in the process.
Assume a similar subject company with inventory of the same characteristics previ-
ously discussed except the inventory has either a high percentage (15%) of warranty claims
or returns for repair, or is of a highly seasonal nature. In these situations, the same basic exit
strategy can be used. However, the initial discounts from normal selling price to the exist-
ing customer base would have to be higher than for the prior inventory. This would allow
the reseller the opportunity to service returns or warranty claims by offering a replacement
item. Pending gross profit margins, initial sales may not exceed cost. In the case of goods
with a highly seasonal nature, and pending the timing of the peak selling period, a more
significant discount would be required in order to compensate for the holding period before
the goods could be resold in the marketplace.
Another appraisal inventory problem that commonly occurs involves a manufac-
turer of multiple custom or specialized parts that are used only by a single buyer or limited
number of buyers. The most obvious example would be a manufacturer of components for
another manufacturer, such as an auto maker. In a situation like this estimating value can
be further complicated by the fact that goods are typically shipped upon completion, and
therefore the finished goods on hand at any point in time is relatively minimal. The result is
that the majority of the inventory value lies in the WIP and/or the raw materials purchased
to make the specific item(s).
If the goods were not sold to the original customer they typically would have little
value other than scrap or salvage value. However, if the manufacturing process can be
completed, and the goods are sold to their intended customer, even if discounted somewhat
from the contracted price, value recovery improves significantly. Key in this process is
whether or not the customer will take the inventory knowing that the original manufac-
turer no longer is able to provide warranty or support if necessary, and whether or not the
original manufacturer is a sole-source or limited provider. Assuming the customer will take
the inventory absent return or service provisions and the manufacturer is a sole- or limited-
source provider, the valuation analysis becomes an analysis of the cost to complete the
WIP. An appraisal under this scenario requires a calculation of all related costs to build out
or complete the item(s) in order to provide a realistic recovery estimate. This is necessary
to determine the recovery available to the lender.
In the event a build-out analysis is required, the appraiser must first look at the
quantity of inventory that would be accepted by the customer, and then what is on hand
versus what is required to manufacture this quantity. In some cases all raw materials may
have already been purchased and are on hand. In other instances, and more likely in the
event of just-in-time inventory management, additional materials would have to be pur-
chased. The critical nature and costs of these various components are key in the analysis
of what to finish, how many to finish, and associated costs thereof. In a scenario requiring
a build-out analysis, the intent is not to continue to operate the company indefinitely until
the contract can be wholly fulfilled, as this no longer constitutes a liquidation. Instead, the
intent is to quantify the amount of inventory that is most likely to be accepted, the price that
would be paid for it, and the costs in terms of material, labor, and other inputs, as well as
the time required to complete the inventory to that optimal order quantity.
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Inventory
Inventory appraisals for lenders require the appraiser to investigate the subject in-
ventory and its potential markets, develop a strategy for selling the inventory, anticipate the
time frame over which the inventory will be sold, and consider all other factors that might
impact value. In some instances a build-out analysis will be required. In the case of a net
value, all related expenses also must be quantified.
Key Points
• Inventory appraisals present the appraiser with a broad and diverse group of subject
properties, as virtually any tangible item was inventory at some point.
• There are various published definitions of inventory. For appraisal purposes, inven-
tory is generally considered to include items that are available for sale.
• Inventory appraisals are primarily required for accounting or financial applications,
appraisals for lenders, ad valorem tax cases, bankruptcy, and other litigation.
• The information-gathering process related to a specific subject inventory includes a
request for information prior to visiting the company site(s), plus additional infor-
mation that is typically gathered on site. Key to the information gathering process
is information obtained via discussion with key company personnel regarding the
subject inventory, the subject company, and relative markets served.
• Sample counting entails the random counting of inventory items so as to ascertain
whether the appraiser believes that the inventory counts or quantities provided are
reasonable.
• Sample testing is a process through which individual line items or SKUs are tested,
analyzed, or measured for various characteristics, including an initial value estimate.
• Key to the provision of inventory appraisals for accounting or financial applications
is the understanding of the accounting principle regarding LCM.
• Fair value appraisals that are used for purchase price allocation have specific guide-
lines, including the use of selling price as the starting point of value, thus crossing
the level of trade.
• Level of trade entails the various levels at which goods are bought and sold. Inven-
tory is valued on the basis of sale to another entity at the same level of trade. The
exception to this is in the event of liquidation, where goods may be offered to
multiple trade levels.
• The retail method of accounting allows the retailer the opportunity to reduce in-
ventory costs by the same ratio as the discounts required to sell goods from the
retail floor. Because these discounts are not taken until the point of sale (i.e., at the
register), inventory values for a given retailer are overstated until the adjustments
for the unrealized markdowns are made.
• Appraisals for lenders, which are typically done under the premise of orderly
liquidation value, entail the development of a disposition or exit strategy over an
approximate time frame.
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Inventory
• Inventory appraisals for lenders may require both gross and net value estimates.
If so, a delineation of the associated expenses used in arriving at the net value is
required.
• In certain instances, an inventory appraisal for a lender may require a calculation of
all related costs to build out or complete the subject WIP. Such an analysis requires
measurement of the quantity of inventory that could be sold and all related costs of
manufacturing and/or preparing the inventory for sale.
Recommended Reading
Barry J. Epstein, Ralph Nach, and Steven M. Bragg, GAAP 2009: Interpretation and
Application of Generally Accepted Accounting Principles. Hoboken, NJ: John Wiley &
Sons, Inc., 2008.
Notes
1
Merriam-Webster’s Collegiate Dictionary, 9th ed. (Springfield, MA: Merriam Webster, Inc., 1983).
2
Ibid.
3
Delaney, Patrick R., Barry J. Epstein, Ralph Nach, and Susan Weiss Budak, GAAP 2004: Interpretation and Application of Generally
Accepted Accounting Principles (Hoboken, NJ: John Wiley & Sons, Inc., 2003), p. 213.
4
Uniform Commercial Code—Secured Transactions U.C.C. – Article 9 – Secured Transactions - § 9–102. Definitions and Index of
Definitions. Cornell Law School. 1 November 2004, http://www.law.cornell.edu/ucc/9/article9.htm.
5
Sarbanes-Oxley Act of 2002, Public Law 107-204, 107th Cong., 2d Sess. (July 30, 2002).
6
Delaney et al., pp. 230–231.
7
Ibid.
8
Ibid., p. 214
9
Ibid., p. 231.
10
Ibid.
11
Barry J. Epstein, Ralph Nach, and Steven M. Bragg, GAAP 2009: Interpretation and Application of Generally Accepted Accounting
Principles (Hoboken, NJ: John Wiley & Sons, Inc., 2008).
304
13
Marine Asset Appraisals
Objectives:
1. Introduce the basics of appraising marine equipment.
2. Describe and discuss values and definitions particular to marine asset

appraisal.
3. Describe methods of appraising non-income-producing pleasure craft.
4. Describe methods of appraising income-producing commercial craft.
This chapter’s purpose is to introduce the reader to the world of marine asset ap-
praisal which is encompassed by the ASA’s designation of Marine Surveys. Early man real-
ized that trade goods could be easily transported by placing them on something that would
float over neighboring waterways. As shipping began, merchant sea captains became busi-
nessmen, carrying their own and others’ goods for sale, trade, or barter. The experienced
sea captains would often give up the sea, staying ashore to run their growing transportation
businesses. Knowing the marine business—from cutting the correct trees for construction
to designing a ship of maximum capacity with a minimum crew—these shore-based ship
captains could advise land merchants on the intricacies of maritime trade. Being a builder,
an operator, a buyer and seller, the sea captains became the first appraisers, based on their
own personal knowledge of the trade. Eventually, mariners built private vessels for plea-
sure, touring, and racing. It was this noncommercial use of marine equipment that became
the separate area of yachting. Whether it is for commercial or noncommercial marine use,
personal knowledge of marine equipment and marine business is still critical in the marine
appraisal world from a tangible-asset viewpoint. Since the early 1990s, standard accepted
appraisal practices have been becoming the norm in the appraisal of marine assets.
This chapter will show how standard appraisal principles are now being applied
to the valuation of marine equipment. Boats, ships, yachts, and vessels are all common
generic terms for marine equipment, which also includes all types of barges, floating dock
structures, and dry docks. These latter assets, which are generally non-self-propelled, are
still often referred to as vessels. In non-income-producing pleasure craft, the terms boat,
yacht, and vessel are often also interchangeable.
Marine equipment generally falls into one of two groups: income-producing or
pleasure craft. Accordingly, as with other property, the way of looking at and appraising in-
come- and non-income-producing property differs. With commercial, or income-producing
vessels, the cost, sales comparison, and income approaches to value are commonly used,
while for yachts, generally only the cost and sales comparison approaches are applied.
305
Detailed physical inspections are extremely important. An appraisal must not be

attempted on a vessel unless the appraiser is knowledgeable about the basic construction
of the vessel—which may be wood, fiberglass, aluminum, steel, etc.—and the basic vessel
type. The appraiser should also be very familiar with the regulations that guide construc-
tion and design. For yachts, these are mainly the heavily followed American Boat and
1
Yacht Council (ABYC) and National Fire Protection Association (NFPA)2 302 regula-
tions. As part of that knowledge for yachts, the appraiser must also be able to use the tools
of nondestructive testing. In yacht appraisals these are probe, nondestructive, and thermal
imaging moisture meters and electrical multimeters. For commercial vessels, it is the audio
gauge machine. For commercial vessels, the appraiser should also have knowledge of ap-
plicable regulations such as the U.S. Coast Guard regulations contained in the Code of
Federal Regulations Section 46, classification society3 rules, NFPA 302, mentioned above,
and knowledge of the basics of vessel construction, stability, and safety.
It should be noted that courts have held marine surveyors/appraisers to be experts
on regulations. They have held that dangerous shortcomings sighted on vessels must be
immediately brought to the attention of the vessel owners or operators, even if the short-
comings are unrelated to the assignment and noticed only in passing.
Pleasure Craft (Non-Income-Producing)

Yachts are generally non-income-producing pleasure craft. As a majority of yachts
are mass produced, the sales comparison approach and the use of pricing guides is usually
accepted and applicable. When the yacht appraisal subject is not a product of mass produc-
tion, the cost approach is usually applicable as discussed here. The income approach is
becoming more relevant as the number of corporate mega-yachts grows. Also, there are
some production pleasure craft that are used for short- and long-term charter. While this
is income producing, it rarely provides a long-term positive cash flow that would exceed
asset value.
Figure 13.1. An example of a pleasure craft.
306
Although there are some production pleasure craft that are used for charter, that is
an income-producing service. A privately owned boat is more like an automobile, in that
there are numerous models built at a known cost with resale values recorded and made
available to and through dealers, brokers, and financing groups. In some cases, valuing
limited-production custom boats is more like dealing with works of art or antiques, where
values can fluctuate widely and sales information is scarce. Pleasure craft (see Figure 13.1)
are often impulse purchases and are nearly always discretionary purchases. As with art,
antiques, or automobiles, whim and fashion can twist a market that is not ruled by income-
producing principles.
For production pleasure craft, valuing is done by the sales comparison approach.
A vessel’s make, model, age, and level of outfitting, as well as other factors, are taken to
4
research resources such as the printed BUC Used Boat Price Guide or the NADA Marine
5
Appraisal Guide . Both of these are subscription books and/or Web sites similar to those
used with automobiles, trucks, and construction equipment. In these guides, instructions
help the appraiser make adjustments for regional differences as well as differences in con-
dition. Appendixes within these guides include value information on outboard motors and
boat trailers. To supplement these guides, the yacht appraiser should also research yacht
brokerage Web sites, subscribe to Web sites that list actual sales, and cultivate relationships
with local sellers and brokers of pleasure boats. These additional sources help round out
one’s view of the market and can help the appraiser by providing information on specific
sales, asking versus selling prices, regional value differences, and the range of comparables
that are being offered or sold.
For pleasure vessels that are in limited production, or that are partially or fully
custom-built, meaningful direct sales comparisons may not be available. For such a vessel,
one step would be to research near-comparable sales of vessels that may be only similar to
the subject of the appraisal. While two yachts may be the same size, the same horsepower,
of the same service/range, and with similar new purchase costs, owners’ or buyers’ points of
view and prejudices may cause large differences of opinion on their “value.” This is similar
to the preferences and disagreements among owners of basically similar automobiles that
are built by General Motors Corporation, Chrysler LLC, or Ford Motor Company. In such
cases, sales of these “similar”/ “dissimilar” vessels may still be mathematically valuable
as an estimation of value where there is no depth of comparables. As always, credible
comparables are always preferred and should carry the greatest weight. One must also
make the proper adjustments to comparables in the same manner as described in Chapter
4: Sales Comparison Approach.
In most cases, and as in the appraisal of various other properties where comparable
sales are not available, the cost approach must be used after establishing the current re-
placement or reproduction cost new. This is done through discussions with yacht builders,
yacht repair yards, and equipment suppliers, and through database information developed
by the appraiser. The next step in the cost approach is deciding upon normal useful life and
remaining useful life. A yacht’s normal useful life varies by its type/design and production
standards. That is, high-speed powerboats may have a life of 10–15 years, while similarly
sized sailboats may have a life of 25–30 years. High-quality cruising boats, power or sail,
may have lives of 30 years and more because owners at this level of involvement usually
maintain the boats at a high level. Therefore, good maintenance practices and life extension
307
work may allow a vessel to have a true useful life far in excess of its theoretical designed
life. To generalize, life extension is not financially rational on a relatively inexpensive
production line powerboat where a replacement can be easily obtained in the marketplace.
This is an example of the principle of substitution. However, the principle of substitution
is at times ignored when owners will invest large sums in maintaining a large, expensive
power or sailboat when an “equal” could be purchased for less on the open market. The
yacht appraiser will run across these instances where ownership and sentiment overcome
financial considerations in the eye of the yacht owner. For some yacht owners, there is no
incurable depreciation. In this category are boats that were originally expensive, mostly
custom-built, and typically rare. But for most pleasure boats and their owners, the standard
rules of curable and incurable depreciation are in effect. Yachts of steel and aluminum con-
struction will generally follow a life pattern of any steel or aluminum vessel, with normal
useful lives that may range from about 30 to 50 years, often but not always depending on
fresh- or saltwater use. When fiberglass was first used for construction, no one had any idea
how long it would last. Estimates are now that these vessels can have a normal useful life in
excess of 50 years. However, while the hull or outside “package” may last for a very long
time, the interior “contents” that consist of the engine, paneling, electrical systems, piping
systems, etc., have a shorter life and actually control the overall normal useful life of these
yachts. As a result of all the variables in design, use, and materials, appraisers must assign
a number for normal useful life that they can defend with statistics or samples.
The appraiser will then need to assign either an effective age or remaining useful
life factor based on the onboard inspection and/or sea trial. A 20-year-old vessel with a
normal useful life of 30 years may be found to have a remaining useful life of two years
or 20 years. The vessel appraisal mantra of “condition, condition, condition” is valid. The
yacht appraiser must also be well versed in yacht construction and applicable regulations
to be able to interpret the true condition of a vessel.
As part of the cost approach, the appraiser must also measure and make adjustments
for all forms of depreciation and obsolescence, i.e., physical, functional, and economic.
Physical depreciation in the form of curable depreciation may be the easiest to calculate, as
the appraiser will deduct what it would cost to place the vessel in the condition that would
be normal for its type, age, and location. In commercial use, this might be referred to as
the “cost to cure.” However, like other non-income-producing assets such as collectible
antiques or cars, to some purchasers there is no such thing as incurable deterioration. It is
not unknown for an aficionado of old sailing or power vessels to purchase a framework of
rotting wood or fiberglass and to rebuild the vessel to a facsimile of its original new condi-
tion at a cost well in excess of the vessel’s actual marketable value.
Functional depreciation in yachts is evident in such things as old and fuel-ineffi-
cient engines, or a lack of heating or air conditioning appropriate for the yacht’s location.
Another form of functional depreciation is an inadequate electrical system, which may
have been fine for the vessel when it was built but will no longer hold up to the demands
of present-day owners with their entertainment systems, microwave ovens, and advanced
navigation systems. There can be some overlap in what one considers physical or functional
depreciation. Deteriorated wiring would be physical depreciation, but original wiring that
is in satisfactory condition but inadequate for modern use would be functional deprecia-
tion. This might also be a case of an all-DC electrical system where modern owners require
308
an AC system. In some instances, functional depreciation, like some physical depreciation,

can be measured by the cost necessary to bring a currently substandard boat up to current
market standards.
A common form of economic depreciation is relocation costs. This is the cost to
move a yacht from the area of the seller to that of the prospective buyer, or to an area where
better values may be found. Since boats are movable, the text of the appraisal report should
cite the location upon which the value was based. Other forms of economic obsolescence
that are becoming more common are the ban in some areas on two-stroke outboard engines,
prospective bans on diesel engines with noxious emissions (Tier 1 versus Tier 2), and
laws governing zero discharge for marine sanitation devices (onboard toilets) and sanitary
holding tanks.
The income approach for yachts is rarely used because most yachts are not used for
commercial purposes. When they are used to produce income, they rarely develop a value
above the value estimate reached using the cost or sales comparison approach, as any value
added in commercial service often comes from factors outside the asset itself such as the
crew, shore support, or operating licenses.
The main exception to this rule is the mega-yacht. With the smaller of these boats
costing more than $10 million and 165-footers ranging from $25 million to more than $50
million, these are not bought out of an owner’s pocket. Also, annual operating costs can
be 12 to 20 percent of the purchase costs. For these boats to make financial sense, they
are often built in the name of a corporation and put out to charter when they are not being
used by the owner. Therefore, they will have records on income and expenses. However,
it would take extensive successful chartering to show significant cash flow and one would
have to be wary about how long a vessel could keep up the cash flow as world economics
and aesthetic tastes change.
Yacht appraisers are called upon to do appraisals for financial institutions, but they
are more often asked to value a vessel for insurance and pre-purchase purposes. In both
cases the appraiser is being asked to give an opinion on the insurability and/or to warranty
the condition of the vessel. These extra duties leave an appraiser open to liability claims
and are why a yacht appraiser must be a yacht expert.
Commercial Vessels (Income-Producing)

For commercial assets, the terms boat, ship, and vessel are often used interchange-
ably. Two of the terms, boat and ship, to many people, arbitrarily refer to a small or large
vessel respectively—small and large being subjective and often depending on trade use.
With much of the commercial fleet (see Figure 13.2) having worldwide use, economic
factors involving a vessel’s ever-changing flag and/or crew can make physical comparisons
of similar vessels difficult in arriving at current or prospective values of one of them. The
appraiser must do the best and most effective job possible with the information that can be
gathered, and must advise the client of what was done in scope-of-work comments.
Although standard appraisal practices are now being used with marine equipment,
the nature of the business with its very mobile assets and the expectations of marine clients
have made some standard machinery and equipment practices, such as infinite comparisons
of comparables and comparable adjustments, difficult and often impossible.
309
Figure 13.2. A bulk carrier and river barge are examples of income-producing commercial vessels.
But, appraisal of commercial marine equipment is still in many ways similar to the
appraisal of other types of machinery and equipment. Several of the main factors that must
be taken into consideration when appraising commercial marine equipment are as follows:
Mobility
Marine equipment is mobile and can be used nationally and/or internationally.
Within some cost and design/performance restrictions, the equipment can be moved under
its own power so the market can be widespread.
Self-Contained
A vessel is made of a hull, machinery, control site(s), the specific equipment related
to its function, and commonly, living quarters. In some markets it is not unusual for all of
these aspects to be replaced, refurbished, or renewed within the normal economic life of
a vessel. Therefore, one or several worn items of a relatively minor nature may not have
much effect on the value of this self-contained economic unit. A reduction of the effective
age, which is therefore an extension of the remaining economic life, is often done when it
has economic benefits over the capital costs of new construction. For many years this was
most evident in the United States and its Jones Act Fleet. However, technological obso-
lescence more than physical obsolescence triggered a new construction boom that started
around 1995 and was still under way in 2010.
Convertibility
Vessels can be converted to alternative uses. As they age, it is not uncommon to
have them converted to a secondary use—usually a market with lower income potential.
However, these lesser markets often require attendant lower maintenance and upkeep
costs. In the past, oil exploitation supply vessels, during a period of oilfield recession, were
converted from Gulf of Mexico oilfield service to Alaskan fish processing factories. Years
later, with an upswing in oil service use and poor market conditions for fish processors,
several of these vessels were returned to the Gulf of Mexico and reconverted for oilfield
service. The practicality of conversion and secondary market use can be ascertained only
by a vessel’s owner through a study of prospective value and the income approach.
310
Uniqueness
Most vessels, even in the same service, are of varied design and built in different
shipyards and often different countries. Even so-called “sister” vessels have variations in
design that may or may not affect value. Therefore, there are no valuation guides that can
give historical costs or current value of these nonproduction vessels. For performing the
cost approach on commercial vessels, it is first necessary to get new or historic costs from
shipbuilders or other resources that publish such contract information. Sources other than
shipyards themselves are the U.S. Maritime Administration6 Web sites and the publica-
tions MarineLog and Fairplay7, which all provide some contract information. Some cost
adjustments may be necessary for unusual outfitting of the vessel being appraised that may
increase or decrease its estimated replacement cost new. Engine type and horsepower rat-
ings may vary along with electrical generating capacities, the level of electronic outfitting,
and variations in amount and type of payload carried.
Commercial Vessels—Cost Approach

For many types of commercial vessels, a normal economic life can be determined
through vessel scrapping statistics. For other types of vessels, it is necessary to find out
the designed life from naval architects, builders, and, specifically, owners. A commercial
vessel’s remaining economic life is often a judgment call of the appraiser based on the
inspection of the vessel and the state of the industry in which the vessel is being operated.
Vessels that carry passengers, hazardous cargo, or cargo on international voyages require
mandatory third-party inspections. These third-party inspectors are often government or
government-contracted inspectors, and the status of a vessel’s inspection, certification, and
documentation is a major factor in its value and, through economic influence, its remain-
ing economic life. The main governmental influence is the port state authorities. In the
United States, this is the U.S. Coast Guard. The U.S. Coast Guard is responsible for many
maritime functions, including periodic inspections of “inspected” vessels. Inspected ves-
sels are generally vessels that are in a service where it is in the public’s interest to maintain
the vessel at a high level. Inspected vessels are, therefore, those that carry passengers for
hire and hazardous and/or polluting cargoes. Other inspected vessels may not necessarily
be in these two categories, but travel offshore on international voyages where the vessel’s
condition could affect the safety of its American crew members. Other maritime countries
throughout the world will have their own port state authorities that will deal with similar
maritime concerns in their country. The other main oversight group is the classification
society. Classification societies were developed in the major maritime countries to help to
create safe merchant fleets. They stem from the interests of commercial marine insurers.
Classification societies vet the design, construction, and, ultimately, the maintenance and
upkeep of a vessel after its delivery. After inspections, classification societies issue cer-
tificates as to the design and construction quality of vessels and vessel components. After
construction, they inspect vessels periodically, usually in a 12-month and a 5-year cycle,
to ensure the vessels are being properly maintained and to make mandatory recommenda-
tions on maintenance. With class certification, vessels, particularly those in international
commerce, will receive favorable insurance rates, and be in compliance with international
maritime regulations, and therefore acceptable to port state authorities.
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It can be argued that many vessels have a residual or terminal value at the end of
their normal economic lives such as a value in secondary use, salvage, or scrap. In such
cases, this residual or terminal value should be deducted from replacement costs new be-
fore the remaining economic life calculation is made, then added back to the resulting end
number. The amount of the “residual” can be estimated by a knowledge of the end-of-life
salvage and scrap market for the type of vessel being appraised.
All vessels will have at least a scrap value, which in the case of large oceangoing
ships may be several million dollars. Other vessels, after their original designed life, may
be suitable for a lesser secondary use that gives a vessel some continuing marketability at
the end of its primary use. An example of this might be an inland waters tank barge which,
at the end of its designed 30-year normal economic life as a tank barge, is taken out of
this heavily inspected service and may then get 5–10 more years as a deck cargo barge or
docking barge (floating pier). At a third stage, this barge may still have scrap value.
As with other machinery and equipment, the three forms of depreciation apply to
commercial marine vessels.
In order to properly assign physical depreciation, the appraiser must have some
knowledge of shipyard repair costs to calculate “cost-to-cure” figures for vessels with
physical depreciation. These calculations may deal with high main engine hours or hull
damage brought about by unusually heavy service and are usually done by direct dollar
measurement. Unlike yachts, commercial vessels can reach a point where there is incurable
physical depreciation and an owner/purchaser will look at the alternative cost of buying
or chartering a new or used vessel. These cost calculation skills are also used by marine
surveyors in the case of marine casualties. If there is a collision, fire, or sinking, etc.,
one must calculate the repair costs so that these costs can be compared with the vessel’s
declared insured value. If repair costs exceed insured value, the vessel may be considered
by the insurance company as a constructive total loss8—a concept in admiralty law.
Functional obsolescence is one of the most difficult measurements in commer-
cial marine appraisal. It is theoretically possible to measure and infinitely calculate all the
variables in a vessel’s design to measure it against the norm, or in the sales comparison
approach with other comparables. But many of the possible comparison factors will be
undiscoverable or have little effect on value. The normal brokerage information available
around the world gives only a vessel’s basics: age, size, capacity, main engines, and, some-
times, speed and class status. Lesser details may be important to individual prospective
buyers, but not necessarily to the market as a whole. The market will be shopping for, say,
a 40,000-deadweight-ton bulk carrier. They may all be priced in a range depending on age
and condition, and, only less importantly, specific outfitting. It is up to the appraiser to
make known to the report user the factors that were taken into consideration for adjustment.
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Figure 13.3. An integrated tug and bulk cargo barge unit.
The starting point for functional obsolescence is a vessel’s payload. How much can
it carry, on a per-unit basis, compared to its competition? This is what earns the vessel its
income. For large seagoing vessels, the total tonnage that the vessel can carry will be indi
cated by its deadweight tonnage (DWT) capacity. In dealing with tonnage, comparisons
should be based on the same type of tonnage, i.e., long tons, short tons, or metric tons. On
passenger vessels, payload is the number of passengers that can be carried. On tank vessels,
payload is the barrel capacity; container ship payload is the trailer equivalency unit (TEU)9;
tugboat payload is the pulling capacity in tons, bollard pull (BP), or, if not available, its
horsepower; and for dry docks, payload is the lifting capacity in tons.
The cost to deliver the payload consists mainly of fuel costs, maintenance costs,
and the cost to staff a vessel. Fuel costs will vary somewhat by the area of the world where
the vessel is being operated or the exact make and model of an engine. Maintenance costs
may vary so widely throughout the world that owners may carry cargo at break-even costs
or even at a loss to stage their vessel into an area where needed maintenance can be done
at a cost that will offset such a loss. Manning costs will vary widely by the countries’ rates
of pay for crew, vessel owner’s and vessel operator’s country of origin, and the vessel’s
country of registration. More often that not, this information will not be available. Here
the appraiser must make the assumption that similar vessels are operating at similar costs.
In some markets it is not only how much can be carried, but also how quickly it
can be carried. Speed is a marketing factor in the carriage of containers in liner service
and in larger ferries in national or international service. Speed can also be a positive factor
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on passenger vessels that need to reach desirable tourist ports within a set period of time.
Conversely, speed may be a market negative when a vessel’s capacity is desirable, but its
larger engines—when not needed for speed—consume more fuel and more maintenance
dollars, therefore, suppressing possible profits.
Consideration should also be given to a vessel’s versatility, such as the number of
cargo types that can be carried. Tankers of similar DWT may vary by the number of tanks
they have, whether they carry raw or refined products, the type of coatings in the tanks, the
number and types of pumps, and the number of types of refined cargoes that can be carried
at one time without risk of cargo cross-contamination. Also, consideration should be given
if the vessel is too large to gain access to some ports, or too small to be used in some areas
of the world where rougher weather conditions are prevalent.
Infinite comparisons in length, width, horsepower, and, sometimes, speed, though
measurable, may not be part of the calculations of a prospective purchaser. However, those
important to the specific marketplace should be considered as important factors by the
appraiser. Therefore, buying decisions beyond net payload need are often made based on
where the vessel was built, crew size needed, vessel design, maintenance costs, and fuel
costs, and not just on the vessel’s overall measurements or tonnage capacity. On paper, ship
A may be 1 or 2 knots faster than ship B, but due to design or stability considerations it
can maintain that speed advantage only in good weather conditions. Thus, the statistically
faster vessel, over a year of voyages, may not make more voyages than the other ship and
may be restricted to use where the weather conditions are more favorable. Simply put, the
appraiser must carefully weigh both the availability of comparison information and its
applicability to specific markets when making adjustments.
The international maritime industry has generally moved slowly as far as innova-
tion, yet each type of vessel is undergoing some technological changes. The appraiser needs
to consider which technologies, changes in functional equipment, or design changes affect
the value of various types of vessels in the fragmented maritime arena. While modern ves-
sels do more, and do it better, they may be doing it with a high debt load. This may affect
orderly liquidation value and prospective values if the industry changes (see Figure 13.3).
The last form of obsolescence, economic, is a very important factor in the large
number of vessels that are “inspected vessels.” Inspected vessels, as noted previously, are
generally vessels that carry passengers, petrochemicals, dangerous cargoes, or cargo in
international trade, or those vessels that are over a certain statutory size. These vessels are
inspected by governmental and/or nongovernmental third parties. The inspections are man-
dated by the country where the ship is registered; by the International Maritime Organiza-
tion (IMO)10, a maritime body of the United Nations; and by insurance underwriters of the
vessels and the cargo they carry. These inspections are performed to help ensure the safe
design, manning, operation, and maintenance of the vessel. If the vessel meets standards, it
is given one or more approval documents, which allow it to be operated in a specific service
for a specified length of time. Renewals of these certificates on older vessels often mean the
vessel owner must spend large amounts of money on maintenance in a prolonged shipyard
stay. Some of these vessels, such as passenger vessels and petrochemical tankers, cannot
be operated at their designed use without some specific certificates, often related to safety.
Unlike aircraft, vessel certification is usually based on calendar date inspections on 1-year,
5-year, and, sometimes, 10-year cycles. Under certain circumstances, and at the discretion
314
of inspecting bodies, inspection dates can be shifted within required time spans. However,
months before a certificate is officially due to expire, the threat of the cost to renew the
certificate can depress a vessel’s value. Present owners and prospective purchasers know
that they are looking at maintenance costs and downtime, both of which may be estimated.
However, particularly with older vessels, inspectors may discover areas of concern that
may unexpectedly increase both maintenance costs and downtime. It is these unknown
prospective costs that can greatly affect an older vessel’s value. On the positive side, after
receiving a new certification that allows the vessel to operate for several years without of-
ficial interference, a vessel’s value increases. This is not only because the necessary repair,
maintenance, and recertification were done, but also because a scheduled period of loss of
income is over, and the “unknown” factor is gone. Many of the considerations on select-
ing and making adjustments in the cost approach also hold true for the sales comparison
approach.
Commercial Vessels—Sales Comparison Approach

With some types of commercial vessels and in some markets, there are sufficient
sales or offering information available to use the sales comparison approach. As there are
no regulations that make vessel sales public information, even to the extent that correct
sales prices aren’t required to appear on a bill of sale, the marine appraiser must develop
sources of accurate sales or market information. Beyond the sale or asking price, the ap-
praiser must also make the correct comparisons and adjustments. As discussed above
regarding functional and economic depreciation, when developing cost information, one
must compare the major attributes of a vessel’s design and performance to the vessel’s
type of use. Again, the major point of comparison is a vessel’s payload (tons, barrels,
horsepower, pulling capacity), its general age, and its general size. Prospective purchasers
are looking for a vessel to perform a generally simple task, i.e., to carry, push, or pull, so
a small difference among comparable boats of up to 15 percent in length, 5–10 percent in
width, plus or minus three–five years in age, and plus or minus 10 percent in horsepower
may make no difference in a buyer’s decision. Therefore, the lists of comparables that an
appraiser may use become a range of possible indirect comparables and not necessarily
direct comparables. In practice, when few close comparables are available, it is necessary
to choose a wider range of comparables. It is still very important that the vessels in the
selected range are properly adjusted to match the vessel being appraised. One of the easiest
ways to compare vessels is to convert a sales or asking price to a dollar-per-payload unit.
This would include such comparisons as a dollar-per-barrel, a dollar-per-passenger, or a
dollar-per-deadweight-ton carried.
Another factor, besides payload, that affects value is a vessel’s age. In fact, when
researching comparables, the only pieces of information that are most commonly made
available to the researcher are a vessel’s age; size (length, breadth and depth); payload,
in actual units or deadweight tonnage; and the asking or selling price. Many, but not all
sources, also give some basic regulatory status information for inspected vessels. The ba-
sic information provided may simply be that the vessel is classed by such classification
societies as the American Bureau of Shipping (ABS) or Det Norske Veritas (DNV) or, if
United States-flagged, has a current U.S. Coast Guard Certificate of Inspection (COI). Or,
the brokerage listing may possibly give an expiration date of one of the major certificates.
315
Because of the lack of detailed condition information available, one must often assume that
a vessel’s effective age is its chronological age. For a vessel that has reportedly been re-
built, the appraiser may mathematically or subjectively select an effective age somewhere
between the build and rebuild dates. Since there are rarely any details on the extent of a
“rebuild,” an age adjustment can sometimes be arbitrary.
Commercial and Yacht—Income Approach

The income approach to value has historically been difficult to use in marine ap-
praising because many companies in the industry are small and closely held and they tend
to be very protective of their financial information. However, suspicions and restrictions
are now starting to ease. Also, more and more companies are publicly held, and financial
information can be obtained on them. However, the appraiser should view prospective
earnings and expenses with an educated eye and ask questions to ensure that the appraiser
understands the source and coverage of the past and prospective financial information
provided.
A common problem with the income approach to value is that the majority of ma-
rine sector businesses, as in many other businesses, have a varied and cyclical income
stream. The income approach usually, at a minimum, requires five years of past financial
data and three–five years of future budgeting. The biggest cost factors for vessels are fuel,
crew, maintenance, and insurance. Future fuel costs are volatile and can best be estimated
after some research. Crew costs, if union regulated, can be measured into the future under
the terms of current union contracts. If nonunion, which is most common, assumptions
must be made that future costs will be based on the current country of origin of the crew
and the crew size. Maintenance costs for inspected vessels, above the usual yearly mainte-
nance tasks, must also include larger expenditures, possibly capital expenditures on older
vessels, for the mandated periodic third-party inspections. The possible shortcomings of
older vessels can bring on unexpected capital expenses that can be incurred due to repair
requirements that are discovered by the class inspector only during these in-depth inspec-
tions. Future insurance costs will also vary by the vessel’s claim history, but it is safe to
figure an annual inflationary factor.
A final decision to make for marine income approach appraisals is a discount rate.
This varies widely by vessel service and differs within service among different areas of the
country or the world. If a specific number is available for the purpose of appraisal, it should
be used. Otherwise, information regarding the calculation of discount rates can be found in
Chapter 5: The Income Approach.
Values Commonly Used in Marine Appraisal

In the marine industry the definitions of value commonly requested for financial
purposes are fair market value (FMV), orderly liquidation value (OLV), forced liquidation
value (FLV), salvage value, and scrap value.
In determining orderly liquidation value or forced liquidation value, it is important
to get as many comparables as possible to see the breadth of the market. Auction informa-
tion, though usually difficult to obtain, is, of course, one of the best sources of informa-
tion for forced liquidation value. The difference between fair market value and orderly
liquidation value for U.S. domestic marine equipment may range from 0 percent to about
316
35 percent. A nearly new asset in a demand market may have the same fair market value
and orderly liquidation value because there are many buyers who would want the vessel
immediately rather than wait 6, 12, or 18 months for a new vessel to be built. For a used
vessel in a normal market, the difference between FMV and OLV may be 15–25 percent.
Older vessels in soft markets may see a 35 percent difference.
Scrap value requires knowledge of both domestic and international scrap markets,
and it is necessary to establish the vessel’s light-ship-deadweight tonnage (LSDWT), which
is considered to be the vessel’s weight empty.
Salvage value is rarely used because most vessels are sold as a unit to a scrap
processor who may, in turn, market some components. More often, the vessel is cut up
in its entirety, machinery and all, for scrap steel weight. Salvage value is used more often
with yachts, particularly those that may have been damaged in marine casualties. Here,
machinery, rigging, sails, and electronics may be sold off with a damaged element, such
as fiberglass hull, actually a liability that may have to be disposed of at some cost in an
approved landfill.
In marine appraisal, a vessel’s fair market value is generally the same whether it is
calculated for financial, litigation, or insurance purposes. In commercial marine insurance
policies, a vessel’s value is the value that was agreed upon in the insurance policy. This
agreement is made between the underwriter and the vessel’s owner, but is based on the ves-
sel’s appraised value and generally does not vary from that value by more than 10 percent.
Yacht policies are usually actual cash value (ACV) policies, but some underwriters will
accept agreed value, particularly on non-standard/non-production boats.
Values Assignments Particular to Marine Appraisal

There are two types of assignments that are particular to marine appraisal.
The first is called limitation of liability. When a vessel is involved in a marine casu-
alty, under certain circumstances under admiralty law, the vessel’s financial liability from
that casualty can be capped at the value of the vessel immediately prior to the casualty;
therefore, limitation of liability. Under admiralty law, this is a retrospective fair market
value of the vessel. For these retrospective values, the marine appraiser can use only ap-
praisal research information that was available prior to the date of the casualty.
The second type of assignment specific to marine appraisal is known as a condition
and valuation survey. This is an appraisal that is done for insurance purposes and provides
current fair market value and replacement cost. What makes this type of assignment dif-
ferent from other appraisals is that the marine appraiser/surveyor, in addition to providing
values, is expected to provide the insurance company with risk assessment information.
This consists of safety and suitability-for-use shortcomings along with the recommenda-
tions for the mitigation of those shortcomings.
Yacht surveyors/appraisers are frequently asked to perform a pre-purchase survey.
As part of this survey, they are asked to determine fair market value. But the main purpose
of this assignment is to determine, in detail, the physical condition of the vessel and all of
its equipment. In taking such assignments, the surveyors/appraisers should be aware that
they are considered to be maritime experts and may be providing warranties of condition.
317
Key Points
• Marine appraisal is generally divided into two main fields: pleasure craft (non-
income-producing) and commercial vessels (income-producing).
• Condition is very important to value, so the appraiser should be familiar with the
vessel type and service, construction method, and any regulations that may cover
its construction and/or upkeep.
• As most pleasure craft are production models, value can be obtained with the proper
use and assistance of used-boat guides.
• Limited production or custom pleasure craft may be valued through the standard
steps of the cost approach. Knowledge of the asset is very important in determining
normal useful life and remaining useful life.
• Commercial vessels are valued by the appropriate use of the three approaches to
value: cost, sales comparison, and income.
• Because many commercial vessels that are appraised operate under various inspec-
tion scenarios, the status of permit documentation is very important and is a mea-
sure of economic depreciation.
• Commercial vessel value is based on the amount of work a vessel can perform.
This can be based on units of carrying capacity (tons, barrels, passengers) or per-
formance (horsepower, bollard pull, or lifting capacity). Speed may also be a value
factor for some vessels.
• Details on commercial vessel sales and offerings are usually limited to a vessel’s
major statistics. This can make adjustment of comparables challenging.
• The values used in marine appraisal are fair market value, orderly liquidation value,
forced liquidation value, salvage value, and scrap value.
• There are two types of values particular to marine appraisal. Limitation of liability
is a retrospective value of a vessel immediately prior to an accident. Condition and
valuation is an insurance appraisal where the surveyor/appraiser must also provide
the insurance company with risk information.
Notes
1
American Boat and Yacht Council (ABYC), Inc., is a nongovernmental council of manufacturers and marine professionals. It produces
“Standards and Technical Information Reports for Small Craft,” which is the product of a “consensus of representatives of government,
industry and public sectors.” This is “a guide to aid the manufacturer, the consumer, and the general public in the design, construction,
equipage and maintenance of small craft.” Although only a guide, ABYC opinions carry much weight in the insurance industry and in
courts of law.
2
The National Fire Protection Association (NFPA) is an organization that was started more than 100 years ago by engineers and
insurance interests to protect buildings by developing safety guidelines for material, design, and construction. The guidelines were to
prevent disasters, fires, and loss of life. NFPA guidelines were eventually widened to include a technical committee on motor craft.
3
Classification societies are private groups that “class” vessels by having them designed and/or built and/or maintained to certain
proven engineering and performance levels. If they are built and maintained to the specifications, with the maintenance documented
by periodic scheduled mandatory inspections, the vessels will maintain awarded compliance certificates. Having such certificates is a
significant factor in reducing insurance premiums. Although the classification societies are headquartered in major maritime nations,
their regulations may pertain to vessels of any flag that desire to be classed by that specific society. (See Marine-Related Resources for
a partial list.)
318
4
The BUC Used Boat Price Guide is issued three times a year on a subscription basis. United States yacht brokers provide actual sales
information to BUC Research, which organizes the sales information by manufacturer, model year, and model name. Statistics are also
given for outboard motors and boat trailers. A section provides adjustments for condition and location.
5
NADA Marine Appraisal Guide provides similar information to the BUC Guide and is also issued three times a year on a subscription
basis. Due to variations in past sources and criteria, boat prices quoted in these two guides vary somewhat.
6
The U.S. Maritime Administration is a branch of the Department of Transportation that oversees the U.S. Merchant Marine and U.S.
waterborne commerce.
7
MarineLog is a monthly magazine that reports mostly on domestic marine business and technology and tracks new construction
contracts and deliveries. Fairplay is a weekly magazine that does the same for the international marine industry and also contains sales
and purchase information and charter rates.
8
A constructive total loss (CTL) is an admiralty law term. It is a situation where the cost to place a damaged vessel back into its pre-
accident condition exceeds its insured value.
9
A trailer equivalency unit (TEU) is the space taken up by a 20’ × 8’ × 8’6” container.
10
The International Maritime Organization (IMO) is a body within the United Nations that develops international standards for maritime
safety and control of ocean pollution. Its regulations do not take on the force of law until they are ratified by a member state.
Marine-Related Resources
Construction, Maintenance, and Safety Regulations
American Boat and Yacht Council (ABYC)
3069 Solomons Island Road, Edgewater, MD 21037-1416
(410) 956-1050
American Bureau of Shipping (ABS)
16855 Northchase Drive, Houston, TX 77060
(281)877-6000
E-mail:abs-worldhg@eagle.org
Website:www.eagle.org
Bureau Veritas (BV)
17 bis, Place des Reflets La Defense 2, 92400 Courbevoie, France
(Postal address: Cedex 44-92077 Paris-La-Defense, France)
+33-1-42 91 52 91
E-mail: veristarinfo@bureauveritas.com
Web site: www.veristar.com
Det Norske Veritas (DNV)
Veritasveien 1
P.O. Box 300, N-1322 Hovik, Norway +47-67 57 99 00
E-mail: iacs@dnv.com
Web site: www.dnv.com
Germanischer Lloyd (GL)
Vorsetzen 32, 20459 Hamburg
P.O. Box 11 16 06, 20416 Hamburg, Germany
+49-40 36 14 90
E-mail: headoffice@gl-group.com
Web site: www.gl-group.com
319
Lloyd’s Register (LR)

71 Fenchurch Street, London EC3M 4BS, England
+44-(0)20-7709-9166
E-mail: Lloydsreg@Ir.org
Web site: www.lr.org
National Fire Protection Association (NFPA)
1 Batterymarch Park, Quincy, MA 02169-7471
(800) 344-3555
Nippon Kaiji Kyokai (NK)
4-7 Kioi-Cho, Chiyoda-Ku, Tokyo 102, Japan
+81-3-3230-1201
E-mail: mpd@classnk.or.jp
Web site: www.classnk.or.jp
Registro Italiano Navale (RINA)
Via Corsica 12, Genova, Italy
(Postal address: Casella Postale 1195) D-16100 Genova, Italy
+39-010 53 851
E-mail: info@rina.org
Web site: www.rina.org
Maritime Statistics
Fairplay Publications, Inc. (Americas Office)
8410 N. W. 53rd Terrace, Suite 207, Miami, FL 33166
(305) 718-9929
MarineLog
345 Hudson Street, New York, NY 10014
(212) 620-7200
United States Maritime Administration
Web site: www.MarAd.dot.gov
Yacht Values
BUC Research
1314 Northeast 17th Court, Ft. Lauderdale, FL 33305
(800) 327-6929
NADA Appraisal Guides
P.O. Box 7800, Costa Mesa, CA 92628
(800) 966-6232
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14
Aircraft Appraisal
Objectives:
1. Identify basic types of aircraft-specific appraisals.
2. Introduction to definitions and abbreviations specific to aircraft.
3. Introduce the basics of the aircraft appraisal process.
4. A brief discussion of damage and damage diminution.
The purpose of this chapter is to introduce the appraisers to the unique aspects of
appraising aircraft and aircraft-specific items. The chapter will review the basic categories
of aircraft and aircraft equipment, introduce the reader to terms and definitions specific to
aircraft, identify the basics of the aircraft appraisal process, and finally introduce a brief
discussion of the nuances of damage and damage diminution as it relates to aircraft.
Types and Categories of Aircraft

There are many models and types of aircraft. It is important for the appraiser to
identify these differences in order to evaluate comparables, costs, and proper markets in the
appraisal process. Many times a particular make and model of aircraft may fit into several
categories, depending on its designated airworthiness or use under a particular Federal
Aviation Regulation (FAR).
Air Carrier Aircraft

Typically air carrier aircraft are those that are aircraft certified under FAR 25, 119,
or 125. Common users of this type of aircraft are airlines or heavy-freight haulers, and op-
erations typically are conducted under FAR 121. These aircraft will have specific mainte-
nance and operation requirements designated by Federal Aviation Administration– (FAA-),
manufacturer-, and operator-approved manuals.
General Aircraft
Typically general aircraft are certified under FAR 23. Uses for general aircraft are
fairly broad and include corporate, personal, charter, and flight instruction. These aircraft
are operated under FAR 91 or 135, and many general aircraft models can be operated
under either FAR 91 or 135. Identifying the proper use for the aircraft in the appraisal will
guide the appraiser in identifying maintenance items, equipment, and proper markets to be
considered in the appraisal process.
321
Aircraft Appraisal
Special-Use Aircraft
Special-use aircraft typically will be identified by the airworthiness certificate is-
sued to it. These aircraft include experimental and restricted-use aircraft. Typically these
aircraft include prototype aircraft, aircraft with after-market modifications which are still
being tested, aerial firefighting, museum aircraft, flight training devices, and ex-military
aircraft. Special-use aircraft may or not be flyable. Special-use aircraft present some unique
problems for the appraiser in identifying possible comparables and comparable sales infor-
mation; so many times the cost or income approach may need to be used.
Fractional/Lease Aircraft
This category of aircraft is best identified by ownership or use, and can include
any of the above aircraft. These aircraft generally should be appraised as a whole aircraft
to avoid any intangible value issues that may arise from any contractual agreements. The
appraiser also should be aware of and ask about any assumptions or limitations that may
be present in any contractual agreements that may describe any special requirements that
must be met in the appraisal process. However, the MTS appraiser still must comply with
any USPAP requirements, and cannot abandon the USPAP regulations merely because of
something that may be specified in a contract document. Some contracts may discuss such
things as hypothetical aircraft conditions (e.g., mid-time engines, no damage, new paint,
new interior).
Business-Related Aircraft Support Assets

As with most industries, a great deal of support equipment is used in aircraft to sup-
port the aircraft itself. Although ancillary, these support items can be very costly and often
are bought and sold in markets entirely separate from that of the aircraft itself.
Spare Parts for Aircraft

New and used spare parts can amount to a considerable amount of value, and these
often also require appraisals. These parts also are regulated by FAR 21. These parts may
be rotable (repairable and reusable) or expendable. The required paperwork that must ac-
company each part can be the largest part of the value. Once identified and classified, the
appraiser may have to rely on random sampling techniques, as discussed in Chapter 7,
Appraising Assets in Groups, due to the huge number of parts in a particular category.
Fixed-Base Operators (FBO)

Fixed base operations include the businesses at an airport that cater to aircraft and
passengers. In addition to the tangible assets and support equipment (discussed later) that
might be appraised by an MTS appraiser, FBO also may require a valuation of the business
enterprise or real property and FBO also might include office furniture and equipment.
Support equipment is a broad category, encompassing equipment found at the FBO,
repair facilities, and the airport. This may include fuel trucks, fuel tanks, repair platforms,
maintenance testing tools, avionic test equipment, tugs, and waste disposal equipment.
Aircraft Engines
While aircraft engines may be considered support equipment or spare parts, engines
also are independent assets. When installed on the aircraft, an engine can be a significant
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Aircraft Appraisal
part of the total aircraft value, depending on life-limited items. As uninstalled spares, en-
gines might be part of the inventory, and their value depends on the condition of the spare
and the quality of the associated required paperwork. Many larger engines are leased or
rented on an individual basis to aircraft operators as separate items, and liens may be filed
with the FAA and International Registry for engines with more than 550 takeoff shaft
horsepower. It is very important that the appraiser identify the engine being appraised by
serial number, and then match the specific engine to its related paperwork.
Purpose and Use of the Appraisal

The intended use of the appraisal is one of the initial critical questions for the
aircraft appraiser. If the aircraft appraisal is to be used for financing or sale, the appraisal
requires answers to a variety of questions, including verification of the aircraft’s airworthi-
ness. An appraisal to be used for insurance claim purposes might indicate that the aircraft
is not airworthy or has been damaged. Once the intended use and intended users have been
established, the appraiser then can identify the purpose of the appraisal. Most aircraft ap-
praisals are ordered to render an opinion of market value. In addition to giving an opinion
of market value, the appraiser might be asked for opinions relating to market-level terms
like wholesale, inventory, and retail. These are terms common to some aircraft pricing
guides; it is up to the appraiser to help the client identify the appropriate definition of value
to be used (e.g., market value, orderly liquidation value, forced liquidation value) to satisfy
the client’s intended use of the appraisal.
The appraiser also may be asked to consider some specific conditions or assump-
tions, such as engine condition and hours of usage.1 These factors should be set forth dur-
ing the establishment of the appraisal scope of work and should clearly be identified and
elaborated on in the appraisal report.
Highest and Best Use

USPAP requires an appraiser to:
analyze the current use and alternative uses to encompass what is
profitable, legal, and physically possible, as relevant to the type and
definition of value and intended use of the appraisal.
USPAP also states that:
in the context of personal property, highest and best use may equate
to the choice of the appropriate market or market level for the type
of item, the type and definition of value, and intended use of the
appraisal.2
Although other situations can impact aircraft appraisal, the USPAP requirement
of highest and best use most often means that aircraft are appraised for use as an aircraft.
However, as in most appraisals, the appraiser also still addresses the highest and best use
considerations of physically possible, legally permissible, financially feasible, and maxi-
mally profitable basis. For aircraft, engines, and spare parts the FARs are the governing
items that outline what is required for these items to be operated legally. An airworthiness
certificate is issued based on meeting certain ongoing criteria, such as specific mainte-
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Aircraft Appraisal
nance. Documentation of these items also is critical to verifying that the asset meets these
requirements. For example, a general aircraft being operated under FAR 91 is required to
have an annual maintenance inspection by an authorized maintenance technician every 12
calendar months to maintain airworthy status. The appraiser needs to verify that this has
been performed and make any necessary adjustments. Understanding which FARs apply
should be part of the appraiser’s initial discussion with the client.3
On a more specific level, the appraiser may also wish to outline in his report the type
of configuration the aircraft is currently operating under, and whether this configuration
impacts the potential marketability and value of the aircraft. For example, an Emergency
Medical Services aircraft may have a more limited resale market than a more generally-
configured passenger aircraft, and such a limitation may affect the value of the aircraft.
Identification of Aircraft Assets

As with all MTS appraisals, the appraiser must clearly identify the subject to be
appraised. Aircraft, aircraft engines, and certain parts are all identified by a manufacturer
serial number. In the case of aircraft and engines these are part of the manufacturer data
plate. Serial numbers can help the appraiser to first and foremost verify that the item is the
proper asset to be valued in accordance with the appraisal contract agreement, and also to:
• Identify the manufacturer
• Identify the model
• Identify the year or date of manufacturer
• Match the documentation to the asset
Often, aircraft components are swapped out for maintenance reasons. If an appraiser
values an aircraft with a particular engine and documentation and it is discovered that the
engine appraised was only a loaner while the actual subject engine was being overhauled,
then a serious mistake would have been made and an erroneous value would have been
developed.
In some types of aircraft, for instance helicopters, a larger number of components
are subject to removal and replacement for maintenance reasons. In certain jurisdictions
this practice may be subject to that jurisdiction’s statutes. Only the aircraft and its engines,
and in the case of prop-driven fixed-wing aircraft, the propellers, are available for Uniform
Commercial Code (UCC) and International Registry (IR) filings for lien perfection of spe-
cific serial numbers. Other components like transmissions and drivetrain components are
considered part of the aircraft and are not subject to individual lien filings.
Inspections
While not always required or possible, inspection of the subject aircraft and its
associated records can be an important part of the appraisal process. Once the appraiser
has determined the need for an inspection, some planning will be required. Historical air-
craft records are not required to be kept with the aircraft and in most cases will be at a
maintenance facility, but current flight logs will be located in the aircraft. The appraiser
should query the client as to the location of the subject aircraft and its associated paperwork
records in order to schedule an inspection. This may require travel to several locations.
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Aircraft Appraisal
During this planning stage the appraiser also should determine any safety or security con-
cerns that may apply during the inspection. These may include safety lectures, release
forms, escorts, limited camera use, or preapproval for certain photos. Because of enhanced
aircraft security measures, inspectors may be turned away. Generally, when possible it is
recommended to start the inspection effort with the aircraft records to give the inspector
some insight into what may be ultimately encountered.
Review of Records
There can be hundreds of records depending on the subject’s use and age, so the
review of the records should be accomplished in a systematic manner. Common records
include airframe maintenance records, engine maintenance records, propeller maintenance
records, computer-generated maintenance summaries and schedules, and FAA forms (in-
cluding 337s). Each type of record should be reviewed with the purpose of identifying
critical items, such as:
• Do the record serial numbers match that of the subject aircraft?
• The continuity of records from date of production
• What language are the records in?
• Is there any mention of damage history?
• What is the inspection history (major, minor, when, what)?
• When was the last paint and interior replacement?
• When was the installation and approval of equipment?
Physical Inspections
The inspection of the subject also should be accomplished in a systematic man-
ner. It is recommended that an inspection form be developed for each appraisal, for the
inspector to use as a comprehensive guide. The critical items that should be included in an
inspection of the subject are:
• Verification of the aircraft serial number. This is a required data plate on the
exterior or interior of the aircraft.
• Verification of the aircraft registration number. Although changeable, the cur-
rent one should be painted on the exterior.
• Verification that the aircraft paperwork matches up with records. Generally
the paperwork required to be inside the aircraft should be its airworthiness
certificate, aircraft registration, weight and balance, and operations hand-
book. In addition to supporting identification and ownership, these items also
should help verify equipment in the aircraft.
• Wings or rotor blades—overall condition (e.g., hail damage, hangar rash,
paint condition).
• Empennage—overall condition (e.g., hail or corrosion damage, hangar rash,
paint condition).
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Aircraft Appraisal
• Fuselage—overall condition (e.g., hail or corrosion damage, hangar rash,

paint condition).
• Landing gear—overall condition (e.g., leaks, tire condition).
• Windows—new, used, crazing or clouding?
• Engines—if required, verify serial number. Are they actually on the aircraft?
Any rentals or loaners installed? If so, why and where are the original engines?
• Interior—overall condition (e.g., seats, headliner, carpet, equipment).
• Interior—how many seats and in what configuration?
Valuation Considerations
Many factors can impact the value of aircraft. The number of takeoffs and landings
(or sometimes power increases to or above a certain limit) are called cycles, and these
cycles can influence value. Aircraft values also can be affected by traffic and competi-
tive price structure, current or previous usage and configuration, and approved operating
extensions, limitations and inspection programs. Avionics and compartment configuration
can be factors. The absorption of aircraft and aircraft spare parts into the marketplace can
have a significant impact on value. The factors that may impact the value of aircraft are
numerous, and each of the many possible influencing factors must be addressed by the
MTS appraiser in the process of determining a credible opinion of value.
Aircraft Maintenance Records

An aircraft owner is required to keep aircraft maintenance records for the airframe,
engine, propeller, and appliances. These records must contain a description of the work
performed on the aircraft, the date the work was completed, the certified mechanic’s sig-
nature, the kind of FAA certificate, and the certificate number of the person approving the
aircraft for return to service. The owner of an aircraft also must ensure that maintenance
personnel make appropriate entries in the aircraft maintenance records indicating that the
aircraft has been approved for return to service. The owner’s aircraft records also must
contain the inspections required pursuant to 14 Code of Federal Regulations (CFR) section
91.409.
Occasionally, the records for an aircraft have been lost or destroyed. In order to
reconstruct them, it is necessary to establish the total time in service of the airframe. This
can be done by referencing to other records, such as those that reflect time in service,
records maintained by repair facilities, and records maintained by individual mechanics.
When these things have been done and the record is still incomplete, the owner/operator
may make a notarized statement in the new record describing the loss and establishing the
time in service based on the research and the best estimate of time in service.
The current status of applicable airworthiness directives may present a more for-
midable problem. This may require a detailed inspection by maintenance personnel to es-
tablish that the applicable airworthiness directives have been complied with. It can be seen
readily that this could entail considerable time and expense, and in some instances might
require recompliance with the airworthiness directive.
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Aircraft Appraisal
Other items required by section 91-417(a)(2), such as the current status of life-
limited parts, time since last overhaul, current inspection status, and current list of major
alterations, may present difficult problems. Some items may be easier to reestablish than
others, but all are problems. Losing maintenance records can be troublesome, costly, and
time consuming. Safekeeping of records is an integral part of a good record-keeping system.
Missing Maintenance Records/Logbooks

The fact that an aircraft does not have original or complete logbooks does not au-
tomatically diminish its value. The fact that logbooks may be missing does not necessarily
mean that the owner caused them to be missing, and as such is out of the owner’s control.
For example, a fire or flood at the records storage facility can destroy records and still be
completely out of the owner’s control. However, if an aircraft has damage in its history or
has had lapses in maintenance, destruction of that plane’s logbook would be a convenient
way to hide these facts, and therefore loss of the logbook may mean that the aircraft’s
history is beyond any further scrutiny. Nonetheless, if a single facility or mechanic has
maintained an aircraft, the logbooks possibly could be reconstructed, thereby eliminating
any impact that may be caused by missing logbooks.
Diminution of Value Assessment, Technical Evaluation, and Airplane

Appraisal
As it applies to the appraisal of aircraft and tangible aircraft-related items, the term
diminution refers to the loss of value when the airplane or its components are involved in
any type of accident or incident. Insured owners often demand compensation above and
beyond the cost of repairs, because they perceive that their airplane may lose market value
when they report any damage history to prospective buyers. In airplanes, the diminution
concept has been used to set airplane prices, but it has been studied as an independent issue
for valuation. Diminution typically is connected to the negotiation price, and its magnitude
depends solely on the opinion of industry experts and professionals with experience in
trading airplanes, and as such diminution essentially depends on personal judgment. The
goal of this diminution section of this chapter is to offer a study to assist the reader to
understand the concept of diminution in a broader sense and find an objective diminution
value model that can be used to grade damaged airplanes in the future.
Diminution Appraisal Methodology and Scope of Work:

Diminution of Value Assessment—Information Request
The appraiser should have a required checklist, covering the information needed
to properly form a diminution of value assessment. Such a checklist should include the
following items:
• A complete set of photographs:
○○ Of the incident (depicting areas of damage)
○○ After the repairs (the complete aircraft—interior and exterior)
• A complete description and factual accounting of the incident
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Aircraft Appraisal
• All repair work orders and invoices with complete and detailed description of
accomplished repair(s), including photographs
• A copy of all logbook entries (if any), including the following data:
○○ Current times of airplane and engine hours/landings/cycles
○○ Airworthiness directive status
○○ List of all service bulletins, Supplemental Type Certificates
(STCs), or modifications completed
○○ Vendor work orders
○○ Copy of the current weight and balance manual
○○ Copy of the current equipment list
○○ Copy of maintenance task or work cards completed
○○ Copies of any FAA Form 337s generated due to this incident
(and any past 337s that relate to prior damage)
○○ A detailed listing of any ground or flight restrictions imposed
on the airplane due to repairs
Factors for Consideration

Many factors must be considered in a diminution value appraisal assignment,
including:
• How recent was the damage?
• Was the incident related to flight or airplane movement (the aircraft was not
under its own power)? Was the damage “static/dynamic”?
• Were there any personal injuries, deaths, or FAA violations? These may tend
to exacerbate a potential buyer’s perception of the severity of the accident.
• Has the repair process been completed? If so, by who, what, where, when,
and how?
• Were damaged parts replaced with new or remanufactured parts?
• How severe was the damage?
• Was the pressure vessel punctured?
• Were operational limitations or recurring inspections imposed as a result of
the repairs?
• Who did the repairs/rebuild? Was it an OEM-approved Part 145 repair sta-
tion? According to Part 43?
• What is the market for this model as of the effective date of diminution?
Each of these factors may have a separate impact on any diminution analysis. These
factors should be considered independently, and not lumped into an arbitrary percentage of
total value, as the subject’s total value also may be influenced by other items not related to
the damage. Such factors include engine overhaul, overall age, and numerous other factors
that normally impact value.
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Aircraft Appraisal
Also a consideration is the acceptance of damage history in the appropriate market

level. For instance, helicopters in the secondary market generally have little or no diminu-
tion in value due to appropriately-repaired previous damage. Helicopter operators can be
ruthlessly pragmatic in such instances, and will generally purchase at an undiminished
price. That said, certain potential buyers will simply refuse to consider a helicopter with
damage history, such as corporate/VIP users. So while a diminution in value may not exist,
a diminution in potential marketability may.
Diminution Conclusion
Diminution is a very subjective concept in the aircraft market. Even though most
experts confirm its role in negotiating the purchase or sale of an airplane, there is no spe-
cific technique or principle that can be applied in every case of diminution. The damage
characteristic of an airplane is one of the many factors that come into play during a transac-
tion negotiating process, and it is very hard to isolate its effects because every airplane
has a different history and every buyer has a different perception of value. Ultimately, the
buyer is the final judge of the aircraft’s total value, including the diminution factor.
While intangible factors cannot be eliminated entirely from diminution of value,
evaluations should be guided by objective criteria. Because a diminution can complicate
or slow the settlement process, the decision to press such a claim should be based on an
understanding of the major factors that an expert appraiser uses in evaluating the claim,
and surprisingly, many times similarly damaged aircraft can be found. An unbiased expert
appraiser should be engaged as soon as possible. In approaching the claim in this manner,
an owner will obtain a fair evaluation and improve the likelihood of a prompt and complete
resolution of the damage event.
The only appropriate method to determine the market value involving the char-
acteristic of damage on an airplane is for a technically qualified, experienced appraiser
to conduct an investigation of the airplane and logs, review specific issues regarding the
repairs, compile all of the elements of the damage event and subsequent maintenance his-
tory, and then apply the conclusions to market activity for the specific aircraft, utilizing
current USPAP standards.
Summary
Aircraft appraising has special terms, regulations, record-keeping, and specializa-
tion. There are many different types of assets, including those associated with fixed-based
operators and repair stations, inventory resellers, aircraft manufacturers, and various types
of certificates that could have added market value. This chapter addresses most of these
areas and is a beginning, but certainly not the total knowledge base that would be required
for formal aircraft appraisal. Aircraft appraisal requires significant analysis and educated
adjustments that may be compounded by market restrictions. Those who desire to appraise
aircraft are encouraged to take special aircraft-related courses. Once the basics of aircraft
appraisal are mastered, it will be necessary to further the education process through actual
hands-on experience. To gain this knowledge, it is best to work with other appraisers who
have this experience. There are many types of unique equipment that make up the aircraft-
specific area, and each requires the proper appraisal experience.
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Aircraft Appraisal
The processes for each type of equipment should be thought out well in advance
before beginning any assignment, with consideration given to appropriate market, highest
and best use (FARs), travel, safety, and security.
Inspections can be very time consuming, requiring many hours to be spent examin-
ing records. Physical inspections should be systematic and planned in advance to cover all
required items and verify serial numbers.
Damage and diminution require considerable experience to assess, but many times
similarly damaged aircraft can be found.
Key Points
• There are many different types of aircraft, including commercial, corporate, charter,
experimental, special-use, military, foreign, antique, and vintage aircraft.
• Many different assets serve in a support role to aircraft, and the aircraft appraiser
often is called on to value this support equipment. These support assets generally
consist of aircraft components, spare parts inventories, fixed-based operators, re-
pair stations, support equipment, avionics, and engines.
• In order to properly value aircraft, it is necessary to know the type of aircraft, the
aircraft’s current or possible use, and the appraisal’s purpose and intended use.
• When appraising aircraft, many unique limiting conditions must be considered, in
addition to those typically applicable to other assets.
• When conducting an aircraft appraisal, the aircraft’s features must be described
properly. In order to do this, the appraiser must be familiar with aircraft surface
nomenclature, as well as avionics and instrumentation. The aircraft’s exterior and
interior should be inspected thoroughly.
• Aircraft inspection should include recording serial numbers and reviewing records,
logs, inspection notes, and maintenance records (including FAA Form 337).
• Aircraft inventory can have significant value, and is being considered more and
more by lenders and taxing authorities. Aircraft appraisers must be familiar with
inventory appraisal in order to meet this demand.
• Aircraft appraisal has special terms, regulations, record keeping, and specializa-
tion. Aircraft appraisal requires significant analysis and educated adjustments, best
understood by taking special aircraft-related courses and working with other ap-
praisers who have this experience.
Definitions, Abbreviations, and Acronyms Specific to Aircraft

Appraisals
(Note: Expanded definitions can be found in the Federal Aviation Regulations 1.)
AAC—Aeronautical Administration Communication
AD—Airworthiness directives
AFM—Aircraft flight manual (required for flight certificate)
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Aircraft Appraisal
Airframe—Combination of fuselage, boom, nacelles, cowlings, airfoil surfaces, landing

gear, and controls
Air carrier—A person who undertakes directly by lease, or other arrangement, to engage
in air transportation
Aircraft—A device that is used or intended to be used for flight in the air
Airplane—An engine-driven fixed-wing aircraft
Airworthiness certificate—The certificate carried in the airplane that indicates the aircraft
is allowed to operate and its category
Annual—As is applies to aircraft, an annual inspection of the aircraft and engines, required
once a year for general aircraft under FAR 91
AOG—Aircraft on ground (the highest priority designation to process a request for parts)
APU—Auxiliary power unit
Avionics—Radios, instruments, and accessories
Block hour—Time measured from the first movement for a flight until coming to a rest at
the next point of landing (includes pull-out from a gate)
CAMP—Continuous airworthiness maintenance program
CSN—Cycles since new
EGPWS—Enhanced ground proximity warning system
ENG—Engine
FADEC—Full authority digital electronic control
FAR—Federal Aviation Regulations (Code of Federal Regulations, Title 14)
FLT—Flight
FMS—Flight management system
FBO—Fixed-base operator (or operations)
GA—General aviation
GPS—Global positioning system
GW—Gross weight
IA—Inspection authorization
JAR—Joint Airworthiness Regulations (similar to FARs, issued by Europe’s Joint Aviation
Authorities)
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Aircraft Appraisal
Large aircraft—Aircraft of more than 12,500 pounds, maximum certificated takeoff

weight
Mach number—An aircraft’s noise signature in relation to the speed of sound
Main rotor—The rotor that supplies the principal lift to a rotorcraft, the individual blades
collectively becoming the rotorcraft’s wing
Major repair—A repair that cannot be done by elementary operations and could affect
weight and balance, flight characteristics, or other qualities of airworthiness
Minor repair—A repair other than a major repair
Registration certificate—A document carried in the airplane that indicates the owner to
whom the subject aircraft is registered
Rotable—Items of an aircraft that are capable of being overhauled
Run-in—Operation of an item to stabilize its characteristics
RVSM—Reduced vertical separation minimum
Stage 1 airplane—An airplane that has not been shown under this part to comply with the
flyover, lateral, and approach noise levels required for Stage 2 or Stage 3 airplanes
Stage 2 airplane—An airplane that has been shown under this part to comply with Stage 2
noise levels prescribed in section B36.5(b) of appendix B of this part of the FARs, and that
does not comply with the requirements for a Stage 3 airplane
Stage 3 airplane—An airplane that has been shown under this part to comply with Stage
3 noise levels prescribed in section B36.5(c) of appendix B of the FARs
STC—Supplemental Type Certificate, which is issued for a major change in original type
design
TBO—Time between overhauls
TCAS—Traffic alert and collision avoidance system
TCAS I—TCAS that utilizes interrogations of and replies from airborne radar beacon
transponders and provides traffic advisories to the pilot
TCAS II—TCAS that utilizes interrogations of and replies from airborne radar beacon
transponders and provides traffic advisories and resolution advisories in the vertical plane
TCAS III—TCAS that utilizes interrogation of and replies from airborne radar beacon
transponders and provides traffic advisories and resolution advisories in the vertical and
horizontal planes to the pilot
Thrust reverser—An aircraft braking device that deploys into engine exhaust, redirecting
the thrust
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Aircraft Appraisal
TTAF—Total time airframe

Total time—The total time accumulated since new
TSN—Time since new
TSMOH—Time since major overhaul
TSO—Technical Standard Order or Time Since Overhaul (see TSMOH above)
Useful life—As it pertains to aircraft, the length of time items are expected to operate with
a constant failure rate
An electronic version of a publication containing all of the above and additional
items can be found on websites such as http://www.pocketgear.com/software_ detail.
asp?id=9704, for use on hand-held computer devices. This format also is available for such
things as the Airmen Information Manual (AIM), Definitions and Abbreviations, and many
other aircraft topics. The book in printed format or PDF can be found at sites such as http://
books.nap.edu/openbook/0309082897/html/310.html.
Notes
1
The use of specific conditions often is evident in leases, and the appraiser always should read all of the terms of any lease that may be
applicable to the subject property and appraisal assignment.
2
The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (Washington, DC: The Appraisal Foundation,
January 1, 2010 through December 31, 2011), p. U-59 and U-60.
3
Aircraft appraisers should familiarize themselves with the FARs. Some areas that may apply most often include:
• FAR Part 1—Definitions and Abbreviations
• FAR Part 91.23—Truth in Leasing
• FAR Part 91.409—Aircraft Inspections
• FAR Part 43—Maintenance, Preventative Maintenance, Rebuilding, and Alteration
• FAR Part 49—Aircraft Titles and Security Documents
• FAR Part 135—Operating Requirements: Commuter and On-Demand Operations
The website for the most current Federal Aviation Regulations FARs is http://www.airweb.faa.gov/Regulatory_and_Guidance_Library/
rgFAR.nsf/MainFrame?OpenFrameSet. Also, it is possible to subscribe to or purchase the most recent FAR book at most aircraft stores
or training facilities.
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15
Use of Technology in MTS
Valuation
Objectives:
1. Define aspects of personal computer (PC) hardware.
2. Define types of software systems and application software.
3. Describe applications of applicable technology.
4. Provide an overview of technologies available.
Because of the need for more sophisticated valuations on a timely basis, the use of
technology in MTS valuation has become more commonplace. The advent of PCs began
a new era in the way appraisers collect, analyze, prepare, and report information. Few
appraisal assignments are performed that do not require some use of PCs in the valuation
and reporting phases. Appraisers, in an effort to increase productivity, now use the PC more
frequently than all other office equipment.
This chapter provides an overview of personal computers and other technologies
that are used in the MTS valuation process. General information about computer hardware,
software, and other equipment is discussed and examined in the context of MTS valuation.
Two things should be noted at the outset: (1) although this chapter refers specifically to
IBM-compatible computers and software because they are most commonly used by ap-
praisers and their clients, nearly all of the information given here is also applicable to most
other systems; (2) this chapter was written in early 2010 and, obviously, reflected current
speed and technology.
Computer hardware is always evolving, with technological breakthroughs occur-
ring on a frequent basis. When it comes to computers, what is state-of-the-art today will
be obsolete tomorrow. Although the following components will likely continue to exist in
PC systems for the foreseeable future, their speed, size, and efficiency will surely change.1
Central Processing Unit (CPU)

The CPU is the device or microprocessing chip that serves as the computer’s brain.
It is one of the 3 basic components of a computer system. It interprets and processes all the
information necessary for the computer to operate. The Intel chip is the most common of
these.
Technology has evolved with multi-core processors, and the current architecture as
this book went to press is the Pentium Dual and Quad Core processors. Clock speed, the
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Use of Technology in MTS Valuation
previous benchmark for rating performance, has been reduced but processor performance
has been enhanced by pipelining (increasing instruction throughput), instruction sets (pro-
gramming), and the previously mentioned core redundancy. The major consideration in
selecting a computer is that the processor is capable of handling complex tasks, allowing
the user to work efficiently and not be at the mercy of a slow computer.
Hard Disk Drive (HDD)

The hard disk or hard drive is the device that stores and records data or information
in the form of a file. Most new PCs come with hard disks measured in gigabytes; 1,000
megabytes (MB) equal 1 gigabyte (GB). Storage capacity is a significant factor in the cost
and desirability of a hard disk, but its performance is also a factor. Many PCs today are
shipped with hard disk capacity between 200–300GB and the maximum capacity is 1.5
terabytes. (One terabyte, abbreviated TB, equals 1,000GB.)
Traditionally, hard disks have been built into the computer system. Recently, the
popularity of the removable hard disk has increased dramatically. These units currently
can store more than 250 gigabytes. Because it can be removed, the removable hard disk
cartridge is the ideal solution for fast, portable, unlimited storage. Some users have now
elected to use a removable hard disk as their primary drive—a fast, simple way to attain in-
creased storage and security. These hard disks have access times equal to previous internal
units and transfer data rapidly.
The most important thing to understand about the hard drive itself is its capacity
to store data. Currently, software programs can require several gigabytes of storage space
(e.g., the Microsoft Windows Vista operating system requires between 20–40GB of drive
space). Using our example of the 300GB drive, a fully loaded version of this software
would consume 13 percent of the available space. This 13 percent is simply for the operat-
ing system and does not include any other programs such as word processors, spreadsheet
applications, and so forth.
Consider that nearly all current appraisal reports, e-mails, word-processing files,
spreadsheets, databases, digital photographs or video, PowerPoint presentations, and other
files all will consume space very quickly. Usually it is wise to invest in the largest possible
hard drive available for the chosen computer model as the cost, while certainly a factor,
should not be the final factor in determining the selection of a particular computer.
Compact Disk-Read Only Memory (CD-ROM) Drive

In late 1995, Hewlett-Packard Development Company, L.P., introduced the first rea-
sonably priced CD drive that could modify, replace, and record data as well (CD-RW, read/
write). This development changed the way information is commonly stored and retrieved.
However, compared to a hard disk, a CD drive is relatively slow. Speed notwithstanding,
the CD drive and advances to it will continue to enhance the multimedia experience.
Digital video disks (DVDs) are similar in appearance to CDs but with far greater
storage capacity. These disks are capable of storing 4.7GB of data in a single layer and
8.5GB for dual layer. A single DVD is capable of storing an entire feature-length movie at
life-like resolutions.
The newest addition to the optical disk family is the Blu-ray disk-recordable (BD-
RE). The name is derived from the blue-violet laser used to read them. This disk was first
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introduced by Sony and Pioneer in 2000 and has a capacity of nearly 50GB or 6 times that
of the DVD format. It was developed to support the emerging high definition video trend
and for increased data storage capabilities.
Most computers today are equipped with some type of CD-ROM or DVD “burner,”
which can be utilized to create backup drives of important data, project files, photographs
and so forth. An important aspect of computer technology is the ability to store mass
amounts of information at a reasonable cost on a standard CD disc.
Random Access Memory (RAM)

This term refers to chips that dynamically store information that a computer can
access at any time while running an application (as distinct from information stored on a
disk). The more RAM a PC has, the better it is able to process large amounts of informa-
tion. Typically PC manufacturers install a minimum of 1GB of RAM in their systems, but
with the demands of the operating system and the application software, more gigabytes are
becoming the standard. It isn’t unusual for systems to be configured with 2–3GB or more.
Monitors and Video Adapter Cards

Monitors and video adapter cards are hardware components that have also experi-
enced technological advancement. Monitors are the devices on which images are generated
and like televisions, they are measured in terms of diagonal screen size (in inches). Video
adapter cards are circuit boards that fit into a PC and generate the signals needed for moni-
tors to display images. LCD (liquid crystal display) or flat-panel monitors have replaced
the traditional CRT (cathode-ray tube) monitors for most applications. LCD monitors are
ergonomic in design and require less desk space. The majority of monitors are currently
shipped as LCD types for all but the most demanding applications such as CAD/CAM,
graphics and video editing.
Keyboard/Mouse
The keyboard is the device from which most information is entered into a computer.
Numbers, letters, punctuation marks, and other characters are positioned on the keyboard
in a layout resembling a typewriter.
The mouse is a pointing device that gets its name because of its resemblance to
a real mouse. Used with software programs that have a graphical user interface (GUI), a
mouse activates commands and performs other tasks such as highlighting text, drawing
figures, and moving around the monitor screen.
Keyboards and mice are now available in wireless options so there are no cords to
limit motion or location of the device, but they do require batteries to operate.
USB Port
The universal serial bus (USB) port is a connection that allows the user to quickly
attach a variety of devices to a computer. It provides a single, standardized method to
connect everything from mice to printers. The Microsoft Windows operating system auto-
matically identifies devices connected to the USB port and installs the necessary software
drivers to allow the devices to run properly. Devices commonly using USB connectivity
include:
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Printers Scanners Mice

Joysticks Digitizing tablets Trackballs
Digital cameras GPS units Webcams
Modems Speakers Telephones
Video phones Storage devices Network connections
Wireless connections
USB was designed for computers but it has become commonplace in video games,
personal digital assistants (PDAs) and other applications. Currently, the transmission speed
is 60MB/sec for high-speed version 2.0 devices. In September 2007, version 3.0 was dem-
onstrated for transmission rates of 5GB/sec; commercial products should be available in
2009–10.
Wi-Fi
Pronounced wye fye, Wi-Fi is a wireless-technology brand owned by the Wi-Fi
Alliance. It is the consumer-friendly name of wireless local area network products based
on the IEEE 802.11 (Institute of Electrical and Electronics Engineers) standards. Common
applications for Wi-Fi include Internet and VoIP (Voice over Internet Protocol) phone ac-
cess, gaming, and network connectivity for consumer electronics such as televisions, DVD
players, and digital cameras.
Wi-Fi is an abbreviation for Wireless Fidelity. Wi-Fi technologies have changed
since their inception in 1997. The growth of this technology has been widespread with
“hotspots” being created in numerous locations. A hotspot is a venue that offers Wi-Fi
access where anyone can use a laptop, WiFi phone, or other suitable portable device to
access the Internet. Hotspots are often found at restaurants, train stations, airports, libraries,
hotels, hospitals, coffee shops, bookstores, fuel stations, department stores, supermarkets
and other public places. Many universities and schools have wireless networks in their
campus. Some cities have even considered providing free Wi-Fi access to their residents.
Bluetooth
Bluetooth is a telecommunications industry specification that describes how mobile
phones, computers, and personal digital assistants (PDAs) can be easily interconnected us-
ing a short-range wireless connection—PAN (Personal Area Network). Using this technol-
ogy, users of cellular phones, pagers, and personal digital assistants can buy a 3-in-1 phone
that can double as a portable phone at home or in the office, get quickly synchronized with
information in a desktop or notebook computer, initiate the sending or receiving of a fax,
initiate a print-out, and, in general, have all mobile and fixed computer devices be totally
coordinated.
Bluetooth requires a low-cost transceiver chip to be included in each device. The
transceiver transmits and receives in a previously unused frequency band of 2.45GHz that
is available globally (with some variation of bandwidth in different countries). In addition
to data, up to 3 voice channels are available. Each device has a unique 48-bit address from
the IEEE 802 standard. Connections can be point-to-point or multipoint. The maximum
range is about 30 feet. Data can be exchanged at a rate of 1 megabit (Mb) per second (up to
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2 Mb/sec in the second generation of the technology). Built-in encryption and verification
is provided.2
USB Thumb Drive / Jump Drive / Memory Stick

Known by many different names, this extremely versatile device is the most ef-
ficient means to transfer files between computers that are not otherwise connected to the
Internet or other network. Additionally, some files are simply too large to transmit via
e-mail; this technology enables the user to share information. Large database files, videos,
and other media presentations are commonly downloaded with this type of device.
Suggested Configuration
For practical purposes, the appraiser may need to consider purchasing a new PC
system, or at least upgrading an existing system, once every three years. This will ensure
compatibility with contemporary software and the ability to exchange data and files with
colleagues and other business professionals.
A certain amount of personal preference enters into any purchase decision as the
user evaluates what is needed versus what it is wanted. All discussions in this text of the
components of computer systems have offered options; all of these factors enter into the
decision in selecting a computer configuration.
Certain elements that were previously used in judging computers (clock speed of
the processor, for example), while still considerations, have been altered by the changes in
the design and implementation of communication within the CPU and memory itself.
Most appraisers invest in a PC or laptop/notebook computer that will accommodate
all the foreseeable needs, with consideration given to the ability to upgrade and update in
the future. Most appraisers try to purchase the largest hard drive and the most memory they
can afford, as these two elements are the most important in maintaining compatibility with
new technology and applications.
Notebook Computers (Laptop)

For those who travel extensively and require portability, a notebook computer is
the solution. Notebooks are small PCs that range from the size of a handheld calculator to
that of an encyclopedia volume. Notebooks include built-in keyboards and monitors and
can be configured to the same specifications as most desktops. Typically they use the same
peripherals, including printers, external monitors, and modems.
Notebooks have now evolved to a point where they are powerful enough to serve as
the main system of many business users. By using docking stations (base units into which
the notebook plugs), users can have instantaneous access to all of their peripherals. Some
docking stations include additional hard drives or backup storage devices.
Wireless technology affords accessibility and notebooks with wireless adapter
cards can access the Internet at many public locations including airports, marinas, coffee
shops, libraries, hotels, arenas, colleges, universities, and many others.
One of the main drawbacks of notebooks is their relatively high cost when compared
to a comparably configured desktop system. An active matrix screen is a more expensive
display and has the clarity and resolution of a high-quality desktop monitor. A dual scan
screen is less expensive but cannot be easily viewed from an angle. Notebook computers
are also relatively fragile and expensive to repair.
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Operating System (OS) Software

OS software refers to the instructional information needed to make a computer
operate. Software consists of programs that, when read by the hard disk, floppy drive, or
CD-ROM drive, signal and direct the computer to perform meaningful tasks. In general,
there are 2 primary types of software: system software and application software.
System Software
Before it can operate, a PC requires some type of system software (also known as
an operating system or OS). This software is responsible for controlling the fundamental
elements of a PC’s hardware resources, including the memory, processing unit, hard drive,
floppy drive, monitor, and other peripherals. The operating system dictates how informa-
tion is interpreted and is the foundation upon which application programs are built. Today,
most PCs use Microsoft Corp.’s disk operating system (MS-DOS).
In addition to the operating system, PCs use a graphical user interface (GUI), Mi-
crosoft Windows Vista. A GUI makes a PC easier to operate. Graphical images or icons
that are accessed using a mouse replace complex keystroke commands. For some time,
Microsoft Corp. has been selling a network version of the Windows GUI, known as Win-
dows NT.
When purchasing system software, it is important to remember that compatibility
with any existing computer hardware is essential. Most new systems come with system
software already installed. When upgrading to a new program, check with the manufacturer
to see if a discounted price is available for upgrades. System software can be purchased
from most of the same sources as computer hardware, directly from the manufacturer, or
from a number of mail-order companies that specialize in software.3
Application Software
Application software refers to a computer program that allows the PC to perform a
certain type of meaningful work. This work can include the manipulation of text, numbers,
graphics, or a combination of these elements. The major applications to be covered in this
section include: word processors, spreadsheets, and database software.
Word Processors
The word processor was introduced in the early 1980s and was one of the first
application programs developed for the PC. Essentially, it was an electronic typewriter
in which typed information could be electronically stored. Today, many word-processing
programs have evolved to a point where the finished products rival those that could be
produced only by a commercial printer or publisher less than a decade ago.
Essentially, a word processor allows the user to perform all the tasks necessary to
prepare a variety of documents, from simple letters to entire books. The basic functions
include entering, editing, copying, moving, searching, and replacing words and text. In
addition, word processors can perform formatting tasks such as highlighting, underlin-
ing, bolding, italicizing, and more. Most word-processing programs include a spell-check
feature that scans documents and alerts the user to potentially misspelled words. Grammar
checkers are also common in the major programs.
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Word processors that operate under a Windows GUI use WYSIWYG technology
(“what you see is what you get”). Under WYSIWYG, the printed output is identical to what
shows on the monitor screen. With a GUI word processor, typefaces and fonts (typeface
subsets) are easily manipulated. In addition, pictures, charts, graphs, and other images can
be inserted into documents. Advanced features include the ability to automate repetitive
tasks or commands (known as macros), create multicolumn documents, generate indexes
and tables of contents, draw figures and diagrams, and copy and insert text from other
programs.
Word-processing software can assist the appraiser in many ways. Some of the more
common uses include the preparation of letters, proposals, reports, exhibits, questionnaires,
invoices, brochures, fax coversheets, newsletters, announcements, labels, and envelopes.
An appraiser can also create templates or boilerplates that streamline the prepara-
tion of the documents mentioned above. For example, a template can be made for ap-
praisal reports that would include all of the standard or generic information common to
all reports. This information might include the body of the transmittal letter, definitions of
value, appraisal methodologies, assumptions and limiting conditions, certifications, and
qualifications. Furthermore, macros or automated keystrokes can be developed to prompt
the appraiser to areas where job-specific information is required. In an appraisal report
template, these areas could include the client’s name and address, the effective date of the
appraisal, the identification of the property, and the purpose of the appraisal. When using
a word processor, the philosophy is, “If you have typed it once, there is no need to type it
again.”
Many of the more popular word-processing programs already contain a variety of
ready-made templates that can be useful to the appraiser. These include standard business
letters, fax cover sheets, invoices, memorandum forms, calendars, and time reports. De-
pending on the appraiser’s preference, it may be sufficient to modify the existing templates
rather than create new ones. Although these tools may streamline and simplify the report
writing process, diligence is still required in reviewing the final product. Seldom does a
template cover all of the specifics of a particular subject and unwavering faith in such will
eventually result in embarrassing mistakes.
Spreadsheets
This type of application software is used to perform mathematical, statistical, and
financial calculations. The spreadsheet screen resembles an accountant’s ledger sheet and
is divided into vertical columns and horizontal rows. The columns are labeled alphabeti-
cally and the rows numerically. The intersection of rows and columns are known as cells.
Depending on the program, a spreadsheet can contain any number of cells. Each cell can
hold text, numbers, or formulas. Some of the more sophisticated spreadsheet programs add
a third dimension—multiple or layered sheets.
The ability to apply formulas is one of the most valuable features of a spreadsheet.
Formulas use data in other cells to calculate a result. With formulas in place, changes made
to one cell can be reflected in calculations throughout an entire spreadsheet. In other words,
a ripple effect takes place.
Spreadsheets are often used to prepare “what-if” analyses. These analyses instanta-
neously show the various outcomes when a change is made to a linked variable. A common
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what-if analysis is a loan amortization schedule. When the term or interest rate variable is
changed, the spreadsheet automatically recalculates the payment amounts.
In MTS appraisal, spreadsheets are commonly used to prepare the asset listings
that appear in the addenda of appraisal reports. Columns or categories of information that
are often found in such asset listings may include location, asset number, quantity, descrip-
tion, manufacturer, model, serial number, normal useful life, effective age, condition, date
acquired, historical or original cost, appraised value, photo number, comments, and pricing
notes.
In an asset listing prepared using a spreadsheet, each row usually contains a sepa-
rate asset, but could contain several items. By using a spreadsheet, as opposed to a word
processor, the appraiser has the ability to manipulate the information in ways that expedite
the appraisal process and create results that are consistent and accurate. Information can be
used in several ways including sorting, searching, rounding, and formatting.
Sorting refers to the ability to arrange data within a given range in an order that the
user specifies. Data can be sorted in ascending or descending order. If an ascending sort
order is selected, data are arranged alphabetically from A to Z and numerically from the
smallest to the largest value. Conversely, if a descending sort order is selected, data are
arranged in the opposite order (Z to A).
The process of sorting involves three fundamental steps. First, the entire range of
information to be sorted is selected. Second, the column by which the range is to be sorted
is chosen. Finally, the sort order (ascending or descending) is selected. If a secondary or
multiple sort is desired, the second and third steps are repeated.
Sorting data can assist the MTS appraiser in several ways. For example, using
a sample spreadsheet containing the columns for an asset listing mentioned above, how
would an appraiser examine or value all assets with a historical cost greater than $1,000?
Without a spreadsheet program, the appraiser would have to search through the listing,
asset by asset, page by page. By selecting the entire spreadsheet as the range, the historical
cost as the sort column, and descending as the order, the data are arranged so that the assets
with the highest cost appear at the top and those with the lowest cost at the bottom of the
spreadsheet. The appraiser can easily examine the assets exceeding the $1,000 threshold.
Other columns or categories used for sorting include description, manufacturer,
model, acquisition date, original cost, asset number, and classification. Sorting by descrip-
tion, manufacturer, or model results in like items falling together. This can make pricing
faster and more consistent. Sorting by acquisition date and historical cost can assist in
the application of cost indexes. Sorting by asset number can streamline the process of
verifying or reconciling assets, especially in instances where corresponding asset tags are
in place. When using the sort feature, it is recommended that a “sort column” be added
to the spreadsheet. This column should be created in advance of any sorting and contain
sequential numbers that allow the spreadsheet to be restored to its original order.
Searching is another spreadsheet function that is extremely useful to the appraiser.
This feature enables the appraiser to quickly locate specific information about an asset
contained somewhere in a spreadsheet. Searching for an asset is a means of looking for a
particular “string” or sequence of characters contained in one or more fields. As with sort-
ing, the first step is to identify the range of information containing the item to be located.
Next, the string of characters that pertains to the item to be found is typed. Using the
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previous sample spreadsheet, assume that a dealer responds to a request for information on
a particular asset. When the request was made, the dealer’s name and company were noted
in the pricing notes column of the spreadsheet. Rather than painstakingly looking through
a printout, the search function can be used to locate the dealer’s name and the asset, and the
appraiser can quickly record the pricing information.
Replacing is an additional option to the search function that can also help the ap-
praiser work more efficiently. The replace option can change or update information on a
range or spreadsheet-wide basis. For example, it has been determined that the subject PC
configurations all have 4MB of memory instead of 1MB of memory. By using the replace
function, the entire spreadsheet can be searched for the string “1MB” and replaced with the
string “4MB.”
Rounding of values is routinely performed during the course of an appraisal. If
the appraisal listing is quite large, a spreadsheet’s rounding formula can save a significant
amount of time. With this function comes the assurance that the appraised values are con-
sistently rounded. However, rounding can affect the resultant calculations and could cause
misleading results.
Formatting refers to the style or manner in which the contents of a spreadsheet cell
are displayed and printed. Certain formats vary between cells containing alphanumeric
information and cells containing numeric information. Common formats for both cell types
include fonts, point size, bolding, italicizing, shading, underlining, outlining, and aligning.
These formatting features enhance or emphasize information found in a spreadsheet. For
cells containing numeric information, formatting can be used to display the figures as fixed
numbers, with or without commas, or as currency. Numeric formatting also allows the
display of a defined number of decimal places, brackets, color or minus sign (–) for nega-
tive numbers, and parentheses.
Database Software
Database software refers to programs used to store and retrieve data; they are used
to provide an organized collection of data. In most cases, databases are structured in terms
of records and fields. A record is a particular listing or entry within a database. It usually
contains several types of information that are known as fields. A record in a database might
contain information about a specific person or company. A field is a particular category of
information, such as a last name or a street address. There are several common types of
fields including
• Character fields (alphabetic information)
• Numeric fields (numeric and monetary information)
• Date fields
• Time fields
The American Society of Appraisers’ directory is a good example of a database.
Joe Smith, ASA, might be one record and Jane Doe, FASA, another. Fields might include
discipline, name, company name, telephone number, fax number, e-mail, and address.
There are two types of database programs: flat-file and relational. A flat-file program
keeps all its information in a single file. Such programs are generally less sophisticated than
relational databases, but they may be adequate for an appraiser’s needs. Flat-file database
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programs frequently used by appraisers include PC-File4, Borland’s Reflex5, and Precision
Software’s Superbase6.
A relational database program stores information in various files. These files are
linked together by key fields that contain matching information or values. Relational data-
bases eliminate redundancy because information between files is shared rather than recre-
ated. Relational database programs can be very large and powerful and are more efficient
for complex uses. Relational database programs used frequently by appraisers include
Access7, Approach8, dBASE®9, FoxPro10, Rbase11, and Paradox12.
Database programs can be used to perform many of the same tasks as spreadsheets.
Sorting, searching, importing, and exporting of data are all routinely accomplished using
database programs. Mathematical calculations such as subtotaling, totaling, extending of
values, and rounding of values can be performed easily. The MTS appraiser can use da-
tabase software for several tasks, including large asset listings, client profiles, dealer and
broker databases, and master pricing databases. Several such applications are described in
more detail below.
A database is useful for generating and printing large asset listings. The number
of assets that can be listed in a spreadsheet is limited to the number of rows the program
contains. Managing large amounts of data in a spreadsheet can be cumbersome. In most
database programs, the number of assets or records is limited only by the storage capacity
of the system’s hard disk. In addition, the software can be programmed to automatically
generate totals and subtotals when the data are printed. For instance, a simple program
might be written to instruct the software to subtotal the value column whenever the loca-
tion field changes.
A database can keep track of client profiles. An appraiser might want to maintain
information about clients, including general information such as client name, company
name, address, telephone number, fax number, and e-mail address. In addition, specific
information including industry, date of last appraisal, conclusion(s) of value, purpose of the
appraisal, contacts, and fee might be included.
Dealer and broker databases can track equipment dealers and brokers who have
provided useful information for past appraisals. Data fields might include their specific
areas of expertise, consulting rates, the engagements for which assistance was provided,
and comment summaries.
Master pricing databases can consolidate pricing information for a specific category
or class of assets. To create a master pricing database, an appraiser could combine all previ-
ously prepared asset listings for clients within the same industry. A medical-equipment
master database, for instance, might include all the asset listings an appraiser has prepared
for hospitals, medical clinics, treatment centers, and doctors’ offices. In addition, it can
include listings and prices from a host of other sources such as manufacturers, used equip-
ment dealers, trade publications, classified advertisements, and pricing guides. By compil-
ing this information in one master database, the appraiser has quick access to it and reduces
valuation and research time.
When selecting a database program, ensure that the software is compatible with any
existing spreadsheet software. Most Windows13-based databases are compatible with other
Windows-based spreadsheets.
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Selecting Application Software

Like hardware, software is continually changing. Each new version of system soft-
ware or application software brings with it new features and enhancements. Hundreds of
software companies and thousands of software programs are available, but Microsoft Corp.
is the largest and most widely recognized. Its products come already installed on many new
PCs.
It is important for the appraiser to use software that is both widely accepted and
up to date. Although it is possible to purchase obscure software or older products for sub-
stantially less cost, the result may be incompatibility with the data of other appraisers and
clients. Frequently, PC manufacturers will include a host of software programs such as a
word processor, a spreadsheet, and a database. These bundled programs are usually suf-
ficient for most, if not all, of an appraiser’s needs.
When purchasing or upgrading software for an existing PC, it is worth looking into
manufacturers’ packaged sets or suites, as they are sometimes called. Packaged sets in-
clude the three main applications and other applications such as presentation software and
personal information managers. By purchasing a suite instead of individual programs, sub-
stantial savings can be realized. The most popular suites include Microsoft Office14, which
contains Word, Excel, Access, and PowerPoint; Lotus SmartSuite15, which contains Word
Pro, Lotus 1-2-3, Approach, and Freelance Graphics; and Corel Word-Perfect16, Office 12,
with WordPerfect 12, Quattro Pro 12, and Presentations 12. Other lesser known software
suites would include NeoOffice17 and StarOffice18; for Apple users there is AppleWorks19.
Before upgrading, check on the word processor’s capabilities for translating, con-
verting, or importing existing word-processing files for use with the new software. In most
cases this will not be a problem, but users of older, more obscure software should research
this carefully. (Further, users should check the “backward compatibility” of the software.
In many cases, earlier versions may not be able to read files saved in the new version’s
format. For this reason, it may be necessary to save a file in an older format so others are
able to open and use the file.)
Online Communications
Online communication refers to the ability to connect a PC to other computers via
a modem on telephone lines, Wi-Fi, etc., using some type of communication software.
Through online communications, a PC can access or log on to online services, the Internet,
or other networks.
Online Services
The term online services refers to the large commercial systems that users pay a
subscription fee to access. These services provide information on a number of topics in-
cluding news, business, sports, and weather. They also include features such as Internet ac-
cess, e-mail capabilities, discussion forums, library centers, shopping areas, encyclopedias,
databases, and other useful information. These services provide their own communication
software and direct access to the Internet.
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Internet
The Internet is the name given to the International Network: a group of global
information resources all linked to one another. Developed in the 1970s by the U.S. De-
partment of Defense and originally called ARPAnet, the Internet has evolved to become
an elaborate network of networks. (A network refers to two or more computers that are
connected to one another.)
Accessing the Internet has become the most popular new phenomenon in the use
of PCs. On the “Net,” a smorgasbord of information is readily available. Networks can be
found that include information on everything from government programs to unusual hob-
bies. Most of these sites are free but this is changing as the Internet develops.
Electronic Mail (E-mail)

A frequently used feature of the Internet is universal electronic mail, or e-mail.
Electronic mail is a means of transferring data from one computer user to another. This
data can be a letter or memorandum, digital image, spreadsheet file, a software program,
or even a video clip. Today appraisal reports are often sent via e-mail instead of by con-
ventional means such as the U. S. Postal Service or FedEx. However, the appraiser must
be extremely cautious when transmitting appraisals by electronic means in order to protect
appraiser-client confidentiality.
With the advent of the facsimile machines, less business was accomplished via
telephone conversations; with the advent of e-mail, less business was transacted with fax
machines. Although facsimile machines and conversations still play an important role in
the appraisal process, e-mail has become the most effective way to communicate with
clients, dealers, and others.
Dealers are often likely to be more responsive to inquiries via e-mail because they
can respond at their leisure. When you call them on the phone, you’re taking their time
at that moment and they may be busy with other tasks. However, if you send an e-mail,
frequently you will find they are more willing to help.
Other Services
The uses of online communications for the MTS appraiser are almost endless. The
appraiser can go online to obtain information on a particular company that is being ap-
praised; collect data on an industry that is of interest; solicit dealer price requests; access
company price lists; search classified sections of major newspapers; request information
from other appraisers; and even seek employment. Appraisers now use online communica-
tions to post their qualifications on Web sites for access by potential clients.
The American Society of Appraisers launched an online service, the Appraisal Pro-
fession Online, in the early 1990s. It was replaced by a Web site in 1998. The ASA Web site
URL is www.appraisers.org. In 2009, ASA initiated a major restructuring and redesigning
project for the entire Web site and the Society’s database and the current site, as of the 2011
publication of this text, reflects many changes with additional enhancements and refine-
ments still being in progress.
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Portable Document Format (PDF)

PDF is an acronym for portable document format, which allows the user to take
a document from its native software (such as Microsoft Word or Excel) and convert the
document into a common file type that is universally readable. PDF has become the default
standard for file sharing; the recipient can download a PDF reading utility from Adobe
Acrobat20, and other Internet sources.
All appraisal documents, engagement letters, equipment lists, the appraisal report
itself, and all other correspondence with the client, dealers, or any other party should be
converted into a PDF format. Under no circumstance should an appraiser provide anyone
with a copy of an appraisal file in an electronic editable format. If someone is intent upon
reconstructing the appraisal report, technology exists to do so; however, the PDF conver-
sion restricts most users from easily altering data. When an appraiser converts all appraisal-
related documents to PDF format, recipients can’t physically alter the contents without
difficulty, which helps maintain security over files sent to third parties.
The acquisition of a full packaged version of a PDF utility gives the user a reader
and tools that allow him or her to edit documents, adding notes, highlights, and a wide
variety of other features determined by the complexity of the software. The software also
installs a print driver utility just like a LaserJet, Inkjet, or other print drivers on your com-
puter. In this case, however, the print driver does not actually use a physical printer and
paper; instead it creates a piece of electronic media that is then saved as a file. After it is
saved, it is possible to send it as an e-mail attachment, archive it, or do most other types of
manipulation as with any other type of electronic file format.
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When researching information, it is possible to save a Web site, an article, or other

information that provides support for the appraisal report. If a PDF print driver is used,
instead of actually printing, this information is stored as an electronic file. These files can
then be saved with the other work papers for that project. They can be printed at a later
date, and shared with colleagues for collaboration and research.
Many of the higher-end PDF applications will allow the merger of different file
types without the need to convert them to a similar software application. For example,
Word and Excel documents, JPEGs, other PDFs, and files including PowerPoints can be
combined. The PDF application makes it possible to sort them into chronological order,
numerical order, or whatever order is desired to have these files produced into a single PDF.
PDF Software Options

The following is a representative list of PDF software options. (Note that because
there are many types of PDF utility programs offering different features such as text high-
lighting and note inserting, digital signatures, and other features; a complete discussion of
the topic is beyond the scope of this book. Additionally, because of the constantly changing
nature of technology and computers, new products are frequently added to the market.)
Adobe Acrobat—The developer of this technology offers differing levels of pack-
aged software for this purpose. It is flexible and feature-packed for PDF creation, editing,
commenting, and import/export. It converts Web sites to single multiple-page PDFs and
can embed indexes in PDF files for fast searching. There are different versions offered, with
the least expensive being the standard edition, currently costing several hundred dollars.
PDF Converter Professional—This is a less expensive option to Adobe, which still
offers numerous and powerful tools to create, edit, and annotate (and more) the PDF format.
It converts PDF files into MS Word and MS Excel files and produces exceptionally accu-
rate optical character recognition (OCR) files on image-only PDFs. It also offers advanced
PDF editing and form filling and removes sensitive data. This software is approximately
one-third the cost of the standard Adobe package.
Other simple programs include Desk PDF Professional and Bull Zip PDF.
Essentially, PDF is the best option for transmitting files that are secure and this
format makes them more universally readable by parties who have a different operating
system or a different type of computer, and who may not have the necessary software to
open a file in its native format.
Digital Dictation
There are two schools of thought on the methodology used to collect the data in the
field as required for listing the equipment within an MTS appraisal report.
Traditionally, appraisers used pencil and paper to record the inventory of assets.
More recently, dictation was the standard. The advantages of this method include the col-
lection of more data, less field time, and less effort, especially when access to informa-
tion such as manufacturer’s specification plates is difficult. One drawback is that after the
information is recorded, it needs to be transcribed. Until the dictation is transcribed, the
appraiser has no ability to review, amend, or delete the field work.
As with computers, technology has changed the work process. Now, dictation de-
vices, or recorders, commonly use either a built-in memory or a removable memory card
347
rather than microcassettes. The advantage to systems using a removable memory card is
that the amount of storage capacity is essentially unlimited. The appraiser simply needs to
insert a fresh memory card for additional recording time. Even units with built-in memory
typically will have sufficient capacity for the majority of appraisal engagements.
All digital recorders use a compression utility, most of which are proprietary. The
appraiser can dictate significant amounts of information with minimal memory utilization.
Using the standard speed setting of a typical digital recorder, a 30-minute recording creates
a file approximately 3MB in size. This allows the file to be sent via e-mail back to the
appraiser’s office.
As with any electronic system, there are potential pitfalls. Backing up data is al-
ways an important aspect of working with computers and technology of any type. The
more important the data, the more frequent the backup should be.
Most digital recorders are supplied with a USB cable, which can be connected to a
computer to transmit the files. Once the files are downloaded, they can be erased from the
digital recorder to clear memory and maximize the recording capacity. Software is usually
furnished to convert the file into a standard Windows WAV (Waveform audio format) file.
WAV files allow voice recognition software to transcribe the information.
Another aspect of the digital recorder is that it is usually supplied with audio jacks
for the connection of a headset/microphone. The advantage of this combination is that it
frees the appraiser’s hands for other purposes. The headset, which is worn like a standard
telephone headset, is equipped with a cable that is connected to the digital recorder, placing
a microphone immediately below the mouth. Some recorders have a record button located
on the front, which can easily be activated.
Voice Recognition Software

Significant advancements have occurred in voice recognition software, minimiz-
ing the need to key in data. One of the leaders in this field is Dragon Naturally Speaking
(DNS). This software allows the appraiser to use voice recognition for e-mail, correspon-
dence, report narratives, and others tasks. It can be used to enter data into Microsoft Excel,
PowerPoint, Access, and many other applications.
Voice recognition systems have their limitations. Manufacturer’s names and mod-
els can be difficult to transcribe on the first attempt. Also, the software listens to a phrase
as dictated and attempts to match the best set of words used in context. There are problems
with homonyms such as to, too, and two; and other similar-sounding words. Dictation of
commas, periods, and other forms of punctuation must be included. This methodology is
not completely accurate. However, it is something to consider because it is likely that the
technology will evolve rapidly, allowing the appraiser to adapt the software to achieve the
desired results and, ultimately, save time.
Mapping Software / GPS

Map Quest21, Delorme22, Google23, Yahoo24 and other software packages or services
available online provide street-level mapping with door-to-door directions. Most of these
are free (except Delorme, which requires a modest investment) and do an adequate job
providing directions from airports, hotels, or other starting points to the subject facility.
348
Unfortunately, all except Delorme require access to the Internet, limiting their use-
fulness depending upon access. Delorme also provides handheld GPS units as well as those
that can be connected to a laptop via the USB port or Bluetooth. There are many stand-
alone GPS units available. Many rental car companies offer some type of GPS system for
an additional daily charge.
Internet Web Searching

The World Wide Web is an invaluable tool to assist in machinery and equipment
appraisal. Appraisers can find comparables, new and used equipment dealers, auctioneers,
storage and drayage companies, industry data, and much more. Basically there are 3 ways
to find information on the Web.
Index Searching
The first and least exact method is called index searching, where broad categories
such as entertainment, business, or travel, etc., are searched. A general topic is selected and
then further links to more specific categories are examined. These types of searches may
be used when other methods have been unsuccessful or the specific data are unknown. This
method is time consuming.
Two examples of Index Search Sites are www.search-beat.com and www.refdesk.
com.
Single Search Engines

This method uses a search engine to find all the matches for a specific query. The
results are usually rated or prioritized by matching the requested phrase. Some search en-
gines provide higher rankings to those resources that pay fees for the priority rankings.
Most search engines use Boolean Logic25 (cat OR dog), (cat AND dog), or (cat NOT dog).
Using a more specific search phrase can eliminate many undesirable results. Using specific
manufacturer names, trademarks, brands, models, or sizes will yield better results. There
are many single search engines including www.yahoo.com, www.webcrawler.com, www.
excite.com, www.snap.com, www.about.com, www.lycos.com, www.hotbot.com, www.
clusty.com, www.google.com—to name a few.
Multiple or Parallel Searching

Unlike a single search engine where it is necessary to type the search query for each
site, multiple search engine queries several engines. It is also possible to select advanced
features for the search and limit the number of hits or the connection time for the search.
The following are examples of multiple search engines: www.vpinpoint.com; www.mul-
timeta.com; www.dogpile.com; www.meta360.com; www.mamma.com; www.ProFusion.
com; www.monstercrawler.com.
Appraisers should try to work with more than one search engine to yield a variety of
results and maximize their findings. Search engines have different capabilities and features,
and the appraiser may find information from one that may or may not be found by another.
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Bookmark the Source

A bookmark is a method to store a Web site for future use. It is a good idea to
store your bookmarks in separate file folders to keep them organized by type of query.
For example, folders might be made for metal working, fabricating, plastic injection and
blow molding, woodworking, high-tech equipment, test equipment, telecommunications,
among others. When bookmarking a site, examine the name that is recorded. In instances
where the stored name is not reflective of the query, the appraiser should rename the site to
something more useful.
In summary, when searching the Web, verbose is better than terse. Use words like
lights, lamps, bulbs to enhance your findings. A search for used machine will often provide
companies that use the machine you are trying to locate. Try substituting one of the five Rs
of used equipment searching, namely:
• Reconditioned
• Refurbished
• Rebuilt
• Remanufactured
• Recycled
Digital Cameras
Along with the previously mentioned tools, the MTS appraiser may use another
tool: the digital camera.
Many cameras take good images and the amount of mega-pixels that they use may
not be as important as the optical zoom capability. Most cameras have a 3–4× optical
zoom and many models are being produced that have a 10×, 12×, or even 18× capability.
Under good lighting conditions, the quality of the image using the digital zoom is usually
good, but hand-holding any camera with significant magnification under difficult lighting
conditions is likely to produce a bad image. The image from the optical zoom is very
good because this magnification is done using the lenses, whereas digital zoom is achieved
via software. The zoom feature allows the recording of details such as a manufacturer’s
identification plate, which may otherwise be inaccessible. It can also be used to emphasize
areas that indicate conditions such as rust, damage, and missing components.
One important aspect regarding cameras is size, because the MTS appraiser must
often carry the camera while making the inventory. A small, light camera is desirable for
this reason.
When shopping for a digital camera, it is important to determine if the lens is made
of plastic or of glass. Manufacturers such as Nikon, Canon, and Olympus produce their
own lens elements, which are made of glass. For the most part, the quality of the image will
be dramatically improved if it is taken through a glass lens. There is no official requirement
to include photography in an appraisal report; however, digital photographs enhance the
report and sometimes can provide the reader with certain aspects of the machinery, such as
condition, unique appearance, or physical size.
Another advantage of digital photography is that it is possible to improve the qual-
ity of an image photograph that may be underexposed or overexposed, crop it if it is exces-
350
sively cluttered with items that detract from the central part of the image, and do other
similar enhancements. There are a number of programs available that can be used for this
purpose and enough software exists to accommodate the skill of any computer user.
Cell Phone
In the ever-competitive marketplace faced by the MTS appraiser, a good-quality
cell phone is vital. Cell phones have become indispensable tools with capabilities that
continue to evolve. Features include Internet access, e-mail, MP3 player, camera, video,
address book, GPS, and other capabilities.
Case Study
Today’s MTS appraiser uses the PC in many facets of the job. Following
is an example of how an appraiser can use some of the components and
software mentioned throughout this chapter for a typical engagement that
begins with a call from a potential client, XYZ Corp.
John, XYZ’s controller, has called Joe Smith of J.S. Appraisal Co. with
an interest in having his company’s furniture, fixtures, and equipment
appraised. John requests Joe’s qualifications and information about J.S.
Appraisal Co. Joe uses his word-processing software to prepare a cover
letter and print his qualifications. Sensing some urgency in John’s request,
Joe decides to send the information via fax using his PC’s fax modem.
John is impressed by Joe’s credentials and his timely response and awards
J.S. Appraisal Co. the assignment. As it turns out, the XYZ Corp. has
extremely accurate fixed-asset records that are maintained on the com-
pany’s mainframe computer. Joe realizes that these records could be quite
useful in the appraisal process and requests that John have the informa-
tion downloaded from the mainframe to a PC-based spreadsheet file, then
transmitted via e-mail.
Once Joe receives the file, he uses his spreadsheet program on his note-
book PC to open the file and sort the information by department and by
cost. He then formats and prints the information in a manner that allows
him to efficiently perform his field inspection. He inserts a blank row
between assets, creating space to add descriptive information, and adds
several blank columns for tag numbers and condition ratings.
After concluding his inspection, Joe returns to his office and incorporates
the new information into the spreadsheet file. He deletes the assets that
were not found and adds assets that were not on the list.
351
Joe then begins his valuation process. By sorting the spreadsheet in order
of descending cost, Joe determines that only twenty assets make up 90% of
the company’s asset expenditures. He concludes that his valuation efforts
would be most efficient if he spent most of his time on these assets. (This
does not mean that Joe will ignore the remaining assets.)
Before he begins contacting dealers and manufacturers, Joe starts his da-
tabase program and opens his master pricing database file that contains all
the major assets he has valued over the past five years. He vaguely recalls
having priced similar assets some time ago but cannot remember the spe-
cific job. A search of his database file brings up several similar assets and
directs him to the specific job name. Upon retrieving the file, Joe finds a
list of sources he had previously contacted and uses this information as a
starting point.
One of the sources now furnishes a price list on the Internet. Using Web
browser, Joe accesses the company’s Web site and downloads the current
price list.
Joe completes his pricing research and incorporates his findings in a new
column he has created in the spreadsheet, which in this case is entitled
“FMV” for fair market value. Joe does another sort by department and
classification, as requested by John, and then inserts the proper formulas
to subtotal and total the values. He prints the spreadsheet entitled “asset
detail” for incorporation into his narrative report.
Joe then opens his word-processing software and brings up a report template
that prompts him to enter the unique information pertaining to his appraisal
for XYZ Corp. Joe uses a voice recognition software program to enter this
information. After completing the report, he opens an invoice template and
prepares his bill. Along with his report, he sends John an e-mail containing
the asset detail spreadsheet. John is so impressed that he recommends Joe
to his company’s major clients.
Before closing out the job, Joe imports the pertinent information from the
asset detail spreadsheet into his master pricing database file.
He also adds John to his client profile database and XYZ Corp. to a word-
processing document entitled “representative clients.”
Key Points
• Personal computers are indispensable tools in MTS appraisal. It is difficult to
imagine preparing an appraisal without them. They perform many of the necessary
tasks to prepare appraisals in a timely manner as required in today’s fast-paced
marketplace.
352
• Software includes system software such as Windows, a word processor such as

Microsoft Word or WordPerfect, a spreadsheet such as Excel, a database such as
Access or dBase, communication software, and Web browsers for Internet access.
• Though PCs can simplify the appraisal process, they should be considered tools that
facilitate the application of sound appraisal research and technique. They should be
used in a manner that enhances the quality of the work product, not to shortcut or
bypass the steps necessary to produce documented appraisal findings.
• Myriad technical devices are available to the MTS appraiser and incorporating
these technological advances into the appraisal process can make the appraiser
more efficient and the appraisal more accurate and appealing.
Additional Reading
Britannica 2008. Chicago, IL: Computer Technology, 2008.
Churcher, Clare. Beginning Database Design: From Novice to Professional. New York:
Apress, 2007. ISBN: 1590597699.
Computer Dictionary. http://www.computerdictionary.info/Sagus.net 2008.
Cowart, Robert, and Brian Knittel. Using Microsoft Windows Vista (Special Edition). Car-
mel, IN: Que Corp. 2006. ISBN: 0789734729.
Cowart, Robert, and Brian Knittel. Using Windows XP. 3d ed. Carmel, IN: Que Corp.,
2004. ISBN: 0789732807.
Hawley, Raina, and David Hawley. Excel Hacks: 100 Industrial-Strength Tips and Tools.
1st ed. Microsoft Encarta Encyclopedia Premium CD. Redmond, WA: Microsoft Corp.,
2008.
Oppel, Andrew. Databases Demystified. New York: McGraw Hill/Osborne, 2004. ISBN:
0072253649.
Rob, Peter, and Carlos Coronel. Database Systems: Design, Implementation, and Manage-
ment. 7th ed. Boston, MA: Thomson/Course Technology, 2007. ISBN: 1418835935.
Rubin, Joseph. F1: Get the Most Out of Excel Formulas & Functions: The Ultimate
Excel Formulas & Functions Help Guide. Los Angeles: Limelight Media, 2005. ISBN:
0974636851.
Sebastopol, CA: O’Reilly Media Inc., 2004. ISBN: 059600625X.
Young, Margaret Levine. Internet: The Complete Reference. 2d ed. New York: McGraw
Hill/Osborne, 2002.
Internet Resources
The MTS Committee of ASA maintains a Web site at www.appraisers.org/disciplines/mts
353
The home page of the site offers a link (URL) to a Body of Knowledge document that lists
Web sites, textbooks, periodicals, and other resources of interest to the MTS professional
appraiser.
Notes
1
Note: References to manufacturers, search engines, software programs, and other specific information that names a product or service,
a trademark, or other such analogous materials are not to be construed as an endorsement by the American Society of Appraisers. They
are included in this chapter to provide information only. It was necessary to mention specific brands at times to illustrate the features,
similar or dissimilar operational characteristics, cost, and so forth. The reader is always encouraged to investigate all available
options, making an informed decision that best satisfies his or her needs and abilities.
2
Bluetooth is named for the 10th century Viking King Harald Bluetooth, who united Norway and Denmark.
3
It is often misunderstood that improved hardware does not imply improved software performance to accompany it. Software tends
to get larger and more complicated over time, and as Wirth’s Law humorously states: “Software gets slower faster than hardware gets
faster.”
4
PC-File was originally written by Jim “Button” Knopf in late 1982, and he formed the company Buttonware to develop, market, and
support it. It may be purchased through Margaret Levine Young, P.O. Box 954, Middlebury, VT 05753.
5
Borland Software Co., 8303 N. Mopac Expressway, Suite A-300, Austin, Texas 78759-8374.
6
Precision Software, US - Main Office, 651 W Washington Blvd., Suite 303, Chicago, Ill. 60661.
7
Access is a Microsoft application, Microsoft Corp., One Microsoft Way, Redmond, Wash. 98052-6399.
8
Approach software is a Lotus product, IBM Corp., 1 New Orchard Road, Armonk, N.Y. 10504-1722.
9
dBase is located at dataBased Intelligence Inc., 2548 Vestal Parkway East, Vestal, N.Y. 13850.
10
Foxpro is produced by the Microsoft Corp., Microsoft Corp., One Microsoft Way, Redmond, Wash. 98052-6399.
11
rBase is distributed by R:BASE Technologies, 3935 Old William Penn Highway, Murrysville, Pa. 15668-1854.
12
Paradox is produced in 128 B,, Stanley Thilekerathne Mawatha,, Nugegoda,, Western Province,, Sri Lanka.
13
Microsoft Windows is a Microsoft application, Microsoft Corp., Microsoft Corp., One Microsoft Way, Redmond, Wash. 98052-6399.
14
Microsoft Corp., Microsoft Corp., One Microsoft Way, Redmond, Wash. 98052-6399.
15
IBM Corp., 1 New Orchard Road, Armonk, N.Y. 10504-1722.
16
Corel USA, 46430 Fremont Blvd., Fremont, Calif. 94538.
17
www.neooffice.org
18
Sun Microsystems, Worldwide Headquarters, Sun Microsystems Inc., 4150 Network Circle, Santa Clara, Calif. 95054.
19
Apple, 1 Infinite Loop, Cupertino, Calif. 95014.
20
Adobe Systems Inc, 345 Park Avenue, San Jose, Calif. 95110-2704.
21
MapQuest Inc., 555 17th Street, Suite 1600, Denver, Colo. 80202.
DeLorme, Innovative Earthmate GPS, Mapping Software, GIS Solutions, and Data, Two DeLorme Drive, P.O. Box 298, Yarmouth,
22
Maine 04096.
23
Google Inc., 1600 Amphitheatre Parkway, Mountain View, Calif. 94043.
24
Yahoo! Inc., 701 First Ave., Sunnyvale, Calif 94089.
25
Boolean logic is named after the 19-century mathematician George Boole. Boolean logic is a form of algebra in which all values
are reduced to either true or false. (http://webopedia.internet.com/TERM/B/Boolean_logic.html) Boolean logic is a type of logic
(using AND, OR, NOT operators, for example) used by search engines to find information on the Internet and in electronic databases.
(For example, to find computer viruses instead of human viruses, you might try the keywords “computers and viruses.”) http://www.
appraisers.org/MTSHome.aspx.
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16
Technical Specialties
Objectives:
1. Define technical specialties.
2. State types of technical specialties.
3. Define the economic concepts affecting the appraisal.
4. State the best appraisal approach for each specialty.
5. Recognize the typical client for each specialty.
The American Society of Appraisers (ASA) consolidated the machinery and

equipment discipline and technical valuation discipline into the machinery and technical
specialties (MTS) discipline in 1994. While machinery and equipment appraisers are pro-
fessionally qualified to value most types of machinery and equipment used in industrial
and commercial uses, they may not have the expertise required to value certain types of
assets without further training and experience. That training includes additional continu-
ing education, working with experts in a specialty, and personally conducting research.
USPAP’s competency provision allows an appraiser to accept an appraisal in a specialty
without prior experience only after explaining the lack of experience to the client and then
doing the research necessary to become competent to perform the appraisal, or by enlisting
the services of a qualified specialist.
Technical specialties appraisers are specialists who have studied and concentrated
in areas that require unique training and specific experience in a particular industry, catego-
ry of property, or discipline. Each specialty requires an understanding of a particular body
of knowledge before a valuation study, analysis, or appraisal can be performed properly.
Each specialty addresses certain types of assets in a manner consistent with its industry or
discipline, and each appraisal assignment addresses different economic concepts and meth-
ods that affect the value of those assets and their users. This chapter describes the unique
specialties within the MTS discipline and discusses the types of assets valued within the
specialties, the economic concepts that affect value, and who uses these specialty appraisal
services. All three valuation methods (cost, sales comparison, and income approach) are
investigated here, but only the most commonly used indicators are discussed for each
specialty. It is important to remember that USPAP requires that all three approaches be
considered, although not all may ultimately be used.
355
Cost Survey Specialty

Appraisers who hold this specialty designation are involved mainly in the alloca-
tion of value or cost among the various components of real property and personal property
in industrial operations, factories, office buildings, and other commercial or industrial set-
tings. They are experts in the cost method of valuation as required for insurance coverage
or insured loss analysis; accounting and tax allocation in mergers, acquisitions, and other
forms of business sales; cost segregations or depreciation lifing studies for income tax
purposes; and valuation or cost analysis in connection with various environmental and
other tax credits.
The cost approach is the most meaningful indicator used by the cost survey special-
ist. The cost survey specialist is familiar with sources of current cost data; indexes; and
quantity survey, unit-in-place, and other methods of estimating costs. Physical deprecia-
tion and functional obsolescence are measured by observation, age/life methods, and other
standard procedures such as cost-to-cure. Cost survey assignments often require a working
knowledge of the various facets of the construction industry, ranging from tract homes
to high-rise commercial buildings to complex industrial structures, as well as a thorough
knowledge of all applicable United States Internal Revenue Service (IRS) tax rulings.
Other services provided by these specialists, in addition to those already mentioned,
include but are not limited to cost analysis for environmental or other tax credits; quan-
titative and qualitative analysis of historical buildings and structures; cost monitoring of
construction projects where progress payments are made by lenders; analysis of building
losses from man-made or natural disasters; verification and confirmation of public funding
for governmental projects; and feasibility analysis of proposed projects. Typical clients for
cost surveys are commercial and industrial property owners, government agencies, lending
institutions, and insurance companies. Cost survey applications are discussed in greater
depth in Chapter 17.
Oil and Gas Specialty

Oil and Gas specialists appraise assets such as oil and gas reserves. Oil and gas
reserves include hydrocarbon-based assets of a tangible and intangible nature in a produc-
ing or unproven field.
Economic concepts that affect value in this specialty include total recoverable
quantity, production rate, and remaining life of the reserves or resources being appraised.
Current and projected future selling prices of reserves or resources significantly influence
value. Value also is influenced by the global market, supply and demand, and market ratio-
nalizations. In addition, changing federal tax laws, investor-required returns on investment,
and the cost of debt affect value. Typical approaches to value include the sales comparison
and income approaches. The income approach usually is developed using discounted cash-
flow analysis, income capitalization, or the capitalization of royalties. The sales comparison
approach is used primarily for surface assets, but reserves also can be used if comparable
transactions are available. The cost approach, while considered, typically is not used be-
cause of the nature of the items being appraised.
Typical clients for this specialty include government agencies, mining companies,
financial institutions, taxation agencies, attorneys, industrial companies, and individuals.
356
Public Utility Specialty

Public Utility specialists appraise assets owned by companies that are regulated
by state or federal governments (although many of these companies are becoming deregu-
lated). This specialty requires sector-specific knowledge taking into account the unique
economic and value characteristics of public utility and power generation properties and
properly recognizing regulatory factors that influence value conclusions. Typical users of
these appraisal services include electric and telecommunications utilities, gas distribution
and transmission companies, cable and satellite systems, airlines, water and sewer systems,
and railroad and other transportation systems.
Economic concepts affecting value within these industries include federal and state
regulations, the general level of economic activity, the stock and bond markets, and na-
tional and local debt costs. Utilities have special accounting requirements and the appraiser
must be familiar with the applicable uniform system of accounts.
Value methodology includes all three approaches: cost, sales comparison, and in-
come. The cost approach frequently is used for unique types of assets for which there is
no quantifiable income stream and no reliable market or sales data. The sales comparison
approach is based either on a “traditional” comparable market sales grid analysis or a stock
and debt analysis. The income approach can be either a discounted cash flow or a single
year’s capitalization.
For utility property, a unit valuation type of approach commonly is used to develop
a value for the entire business enterprise or going concern. The unit valuation approach is
a technique that uses parts of all three indicators of value. Because of rate-base regulation
and the emphasis on strict property accounting rules, the cost approach typically is based
on the asset inventory represented by the property records and its historical costs, which
often are adjusted to value using cost trends and depreciation techniques based on age. The
income approach to value often is given considerable weight.
These specialists estimate values, tangible and intangible, for properties in connec-
tion with rate-case studies, sale or acquisition, eminent domain (condemnation), property
tax appeals, and insurance placement.
Other Specialties
Other specialists within the MTS discipline include Marine Surveys and Aircraft
Appraisal. See Chapters 13 and 14 for further discussion of these appraisal specialties.
Key Points
• Technical specialties appraisers are involved in the appraisal of aircraft, marine
equipment, and public utilities, as well as performing cost surveys.
• Like other professions, the MTS appraisal profession has grown to encompass
specialized fields. To be successful in these fields, the appraiser must develop a
concentrated knowledge, obtain additional training, and be familiar with the ap-
plicable valuation methods.
357
Technical Specialties References

Hydrocarbon Processing. Gulf Publishing Company, Houston, TX. http://www.hydrocar-
bonprocessing.com/.
Oil and Gas Journal. PennWell Publishing Company, Nashua, NH. http://www.ogj.com/
index.html.
Public Utilities Fortnightly. Public Utilities Reports, Vienna, VA. http://www.fortnightly.
com/.
U.S. Bureau of Mines, Department of the Interior, Washington, DC. http://www.doi.gov/.
358
17
Cost Segregation Studies
Objectives:
1. Introduction to Cost Segregation Studies.
2. Discuss aspects of Cost Segregation Studies.
3. List excerpts from the IRS’s Cost Segregation Audit Techniques Guide.
4. Summary. Define technical specialties.
MACRS: The “Why” of Cost Segregation

Taxpayers often find themselves in a quandary when faced with matters such as
the federally mandated Modified Accelerated Cost Recovery System (“MACRS”) for
depreciation, sales and/or property taxes, and risk management. The requirements under
MACRS are not easily definable. Property and sales taxes vary by jurisdiction, and risk
management has varying parameters. This is especially true when it comes to industrial,
institutional and commercial properties.
Whether building a new facility, expanding an existing facility, purchasing or re-
habilitating an old facility, or relocating with associated tenant’s improvements, it is nec-
essary to develop depreciation schedules for the costs capitalized for the project. Under
federal tax law, real property is depreciated over 39 years, land improvements over 15
years, and various classes of personal property over 3 to 20 years. Clearly, costs classified
to shorter depreciation periods increase tax savings in the first year, and continue those
savings throughout the depreciable life of the identified asset.
Most taxpayers have difficulty in developing depreciation schedules under MACRS
that maximize their tax savings. This difficulty is based, in part, on the vague language and
lack of instruction found in the Internal Revenue Code. The matter is compounded by the
need for a combined knowledge of construction, engineering and tax methods in order to
properly address the matter. The key to tax savings, then, is the application of this com-
bined knowledge applied in accordance with tax law, tax court decisions, revenue rulings,
technical advice memoranda, and the like.
359
Introduction to Cost Segregation Studies

ASA offers a Cost Surveys designation under the MTS discipline. This designa-
tion covers the performance of cost segregation (CS) studies. A cost segregation study
is the best tool to uncover the tax savings buried in the construction costs. These studies
encompass in-depth analyses of the blueprints, specifications, direct and indirect capital-
ized costs for projects that enable even lump sum contracts to be unbundled to permit the
appropriate assignment of costs to shorter depreciation periods. As the use of CS studies
increased, the IRS issued its Cost Segregation Audit Techniques Guide in 2007 to assist its
examiners as they review the CS studies. The Guide is established in the legal precedence
case of Hospital Corporation of America v. Commissioner [109T.C.21 (1997)]. (This case
is discussed in greater depth later in this chapter.) This ruling legitimized the use of CS
studies and became the basis for what the IRS expects of a person who performs a CS study
and what that study should include.
As mentioned earlier, CS studies are beneficial to property owners because of the
long-range benefits that accrue by virtue of the reclassification of assets into shorter tax
lives. An appraiser does not have to be a tax expert to perform CS studies, but the appraiser
must understand buildings and building components in order to reclassify items into shorter
lives. CS is regulated by a large body of tax laws, but the IRS published Cost Segregation
Audit Techniques Guide to assist its employees, thereby also providing a useful document
to serve as a road map for those preparing CS studies.
This guide elaborates on the various methodologies that the IRS will accept for
an accelerated depreciation allocation study. It explains that it is possible to perform CS
studies in varying degrees of detail, but states that what it calls the “detailed engineering
approach” to be “in general…the most methodical and accurate approach relying on solid
documentation and minimal estimation.”
In order to calculate depreciation for Federal income tax purposes, taxpayers must
use the correct method and proper recovery period for each asset or property owned. Prop-
erty, whether acquired or constructed, often consists of numerous asset types with different
recovery periods. Thus, property must be separated into individual components or asset
groups having the same recovery periods and placed-in-service dates in order to properly
compute depreciation.
The scope of work for a CS study generally entails the following:
• Agreement with the client as to the overall effort,
• Accumulation of all construction cost records and all construction drawings
and specifications,
• A site visit to identify any short-life items, any possible personal property, and
any other items that could impact the study,
• Breaking down the costs of short-lived items from long-lived actual construc-
tion costs and assigning applicable construction indirect costs to all of the
various short- and long-lived items, and
• Preparing a detailed and itemized CS report.
When the actual cost of each individual component is available, this is a rather
simple procedure. However, when only lump-sum costs are available, cost-estimating tech-
360
niques may be required to segregate or allocate costs to individual components of property

(e.g., land, land improvements, buildings, equipment, furniture and fixtures). This type of
analysis generally is called a CS study, CS analysis, or cost allocation study.
The sample CS Summary (Table 17.1) shows approximately 20% of the total proj-
ect cost re-assigned to shorter-lived classifications.
Sample Cost Segregation Summary

Cost Code Description Total Cost 39 Year 15 Year 7 Year 5 Year
100-01 Site improvements $88,400 $88,400
100-02 Paving/walkways $188,450 $188,450
100-03 Site lighting $86,400 $86,400
100-04 Landscaping $23,670 $23,670
100-05 Flagpole $2,400 $2,400
200-01 Substructure $678,600 $678,600
200-02 Superstructure $2,370,600 $2,370,600
200-03 Interior construction $642,000 $642,000
200-03 Doors and windows $245,700 $245,700
300-06 Folding/moveable partitions $28,450 $28,450
300-08 Window treatments/drapes $9,640 $9,640
300-09 Carpet-strippable $154,900 $154,900
300-10 Wall covering-strippable $88,650 $88,650
300-12 Fire extinguishers $3,700 $3,700
300-14 Projection screens $6,450 $6,450
350-01 Raised computer room flooring $68,160 $68,160
400-02 Structural steel reinforcement $48,800 $48,800
500-01 Fabric panels $14,200 $14,200
600-01 Lunchroom equipment $16,750 $16,750
600-02 Lunchroom plumbing $23,640 $23,640
630-01 Computer room AC system $43,550 $43,550
650-03 Dedicated electric circuits $38,400 $38,400
650-04 Emergency lamps-battery $7,450 $7,450
700-02 Computer room deluge system $42,100 $42,100
Total- $4,921,060 $3,936,900 $389,320 $- $594,840
% of Total 100.00% 80.00% 7.91% 0.00% 12.09%
Table 17.1
CS requires some skill to determine which items should be categorized as tangible

personal property versus those which become building components. U.S. Treasury Regula-
tions Section 1.48-1(e)(2) states that structural parts of a property are those that relate
to the operation or maintenance of a building, while Section 1.48-1(c) says that tangible
personal property is therefore all property “except land and improvements thereto, such
as buildings or other inherently permanent structures” and that tangible personal property
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is “all property (other than structural components) which is contained in or attached to a

building.” Thus, examples of building components are walls, floors, plumbing and fixtures,
electrical wiring, and stairs, while examples of tangible personal property include lathes,
milling machines, and computer equipment.
Theory of Cost Segregation

The IRS allows property owners to depreciate assets, but this depreciation must
be accomplished over time. The IRS guideline is that income-producing residential prop-
erty should be depreciated over 27.5 years, while commercial, industrial and institutional
property must be depreciated over 39 years. A CS study enables the property owner to
accelerate this depreciation by identifying certain allowable assets to be depreciated over
shorter periods. For income tax depreciation, real property is classified as Section 1250 and
personal property is classified as Section 1245.
Many of the decisions regarding how an item should be categorized are based on
combinations of various laws coupled with assorted court decisions. As mentioned earlier,
the most notable court decision is Hospital Corporation of America, et al v. Commissioner
(109TC 21 [1997]). This case stated that if an asset would have qualified under Section 38
of the repealed investment tax credit laws, then it would still be qualified as Section 1245
tangible personal property, and this includes items such as piping and wiring if these items
serve other components qualifying as Section 1245 property. Other factors that enable
items to be classified as qualifying Section 1245 property include permanency, remov-
ability, portability, and decorative aspects.
Excerpts from the IRS’s Cost Segregation Audit Techniques Guide

The IRS has gone to great lengths to describe various aspects of CS. Therefore, in
an effort to enable the reader to become more acquainted with CS, the following italicized
text has been excerpted from the IRS’s Cost Segregation Audit Techniques Guide with the
IRS’s approval.
Various methodologies are utilized in preparing cost segregation studies, including:
1. Detailed Engineering Approach from Actual Cost Records
2. Detailed Engineering Cost Estimate Approach
3. Survey or Letter Approach
4. Residual Estimation Approach
5. Sampling or Modeling Approach
6. “Rule of Thumb” Approach
Detailed Engineering Approach from Actual Cost Records

The detailed engineering approach from actual cost records, or “detailed cost
approach,” uses costs from contemporaneous construction and accounting records. In
general, it is the most methodical and accurate approach, relying on solid documentation
and minimal estimation. Construction-based documentation, such as blueprints, specifica-
tions, contracts, job reports, change orders, payment requests, and invoices, are used to
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determine unit costs. The use of actual cost records contributes to the overall accuracy of
cost allocations, although issues may still arise as to the classification of specific assets.
This approach is generally applied only to new construction, where detailed cost
records are available. For used or acquired property and for new projects where original
construction documents are not available, an alternative approach (e.g., the “detailed
engineering cost estimate approach”) may be more appropriate.
The detailed cost approach is the most time consuming method and generally pro-
vides the most accurate cost allocations. However, the examiner should recognize that the
proper classification and costs of § 1245 property could still be an issue with this method.
Detailed Engineering Cost Estimate Approach

The detailed engineering cost estimate approach (or detailed estimate approach) is
similar to the detailed cost approach. The difference is that the detailed estimate approach
estimates costs, rather than using actual costs. This approach is used when cost records are
not available or for an acquisition when the purchase price must be allocated.
The detailed estimate approach is methodical, relying on solid documentation and
utilizing construction-based documents such as blueprints, specifications, contracts, job
reports, change orders, payment requests, invoices, appraisals, etc. When estimates are
required, they are based on costing data, either from contractors or from reliable published
sources (e.g., R. S. Means or Marshall Valuation Service). The sources of estimating data
are clearly referenced, including identification of the specific volume, page, and item num-
ber. Further, the same estimating techniques and unit cost data sources are used for all of
the items that comprise the actual cost.
In essence, the steps for this approach are the same as the detailed cost approach,
except for Step 7 (in which costs come from contractor estimates or estimating guides).
However, if detailed cost estimates are prepared by qualified individuals, and the estimates
are reconciled to actual costs, then reasonably-accurate cost allocations are possible.
Survey or Letter Approach

The survey or letter approach is an alternative method for estimating costs. In this
approach, contractors and subcontractors are contacted via a survey or letter to provide
information on the cost of specific assets that they installed on a particular project. These
costs are then used in one of the engineering approaches or in the residual estimation
approach (discussed in the following section). Cost allocation using the survey approach
involves the following steps:
1. Complete Steps 1–6 of the detailed cost approach to identify the spe-
cific property items that require cost estimates. Estimates should be
reconciled to an actual cost if possible [either to an overall project
cost or to an individual system cost (e.g., plumbing, electrical)].
2. Divide property items by contractor and/or subcontractor.
3. Ask contractors and/or subcontractors to provide the quantities and
prices of specific property items.
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4. Use unit cost estimates obtained from the surveys to determine and
allocate property costs.
In situations where the contractor provides actual cost data, the allocations may
be reasonably reliable. However, when contractor data is obtained from other sites or
projects, the data may not be comparable or reliable. The amount of detail provided by
different contractors may also vary. The wide disparity in cost estimation methods dictates
the use of caution to ensure that the total allocated costs do not exceed the actual total
project cost.
Residual Estimation Approach

The residual estimation approach is an abbreviated method in which only short-
lived asset costs (e.g., 5- or 7-year property) are determined. Short-lived asset costs are
added together and then subtracted from the total project cost. The remaining or “residual”
cost is then simply assigned to the building and/or other long-lived assets. Although this
method is simpler and less time consuming than the engineering approaches, it can also
be less accurate.
It should be recognized that this method generally does not reconcile project costs.
In general, residual costs are not estimated or checked for reasonableness. A proper and
“reasonable” residual cost should always be determined and then added back to the total
of all short-lived asset costs to check if the total project cost is reconciled.
It should also be understood that different estimation techniques for short-lived
assets can produce a skewed result in favor of § 1245 property (e.g., § 1245 property based
on single-unit costs for high quality construction, while the building is based on gross
square footage).
Sampling or Modeling Approach

The sampling or modeling approach uses a created model (or template) to analyze
multiple facilities that are nearly identical in construction, appearance and use (e.g., fast
food chains and retail outlets). The use of sampling minimizes resources and costs com-
pared to conducting studies on all properties.
Typical steps are:
1. Stratify properties by type of facility (e.g., free-standing facility, mall
location, leased or owned property, etc.).
2. Perform a cost segregation study on a sampling of properties within
each stratum.
3. Based on the results in Step 2, develop a standard model for each type
of facility.
4. Apply the costs derived from the model(s) to the population on a per-
centage basis. For example, the model may indicate that 10% of the
project costs are allocable to 5-year property. This same percentage is
then applied to each facility within the same stratum.
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A frequent issue is the accuracy of the sampling results. In some cases, the sampling
method may not be statistically valid. In addition, a population less than 50 could limit the
accuracy of a sampling technique, unless an appropriate sampling error is considered.
Also, despite the fact that facilities within certain strata may appear to be very similar,
variations in building codes, geographic location, and material and labor costs may make
it difficult to determine an appropriate model.
“Rule of Thumb” Approach

Some cost segregation studies are merely based on a “rule of thumb” approach. In
general, this approach uses little or no documentation and is based on a preparer’s “expe-
rience” in a particular industry. For example, a preparer will estimate § 1245 property as
a fixed percentage of project cost by relying on previously determined “industry averages”
(e.g., 40% for a manufacturing facility). An examiner should view this approach with cau-
tion, since it lacks sufficient documentation to support its allocation of project costs.
WHAT METHODOLOGY IS REQUIRED BY THE IRS?

Neither the Service nor any group or association of practitioners has established
any requirements or standards for the preparation of cost segregation studies. The courts
have addressed component depreciation, but have not specifically addressed the method-
ologies of cost segregation studies.
The Service has addressed this issue but only briefly, i.e., Revenue Ruling 73-410,
1973-2 C.B. 53, Private Letter Ruling (PLR) 7941002 (June 25, 1979), Chief Counsel
Advice Memorandum 199921045 (April 1, 1999). These documents all emphasize that the
determination of § 1245 property is factually intensive and must be supported by cor-
roborating evidence. In addition, an underlying assumption is that the study is performed
by “qualified” individuals or firms, such as those employing “…personnel competent in
design, construction, auditing, and estimating procedures relating to building construc-
tion” (PLR 7941002).
Despite the lack of specific requirements for preparing cost segregation studies, tax-
payers still must substantiate their depreciation deductions and classifications of property.
Substantiation using actual costs is generally preferable to the use of estimates. However,
in situations where estimation is the only option, the methodology and the source of any
cost data should be clearly documented. In addition, estimated costs should be reconciled
back to actual costs or purchase price.
OVERVIEW
In order to better understand the tax controversy surrounding the use of cost seg-
regation studies, it is important to review the relevant legal history and the motivations
of taxpayers to allocate costs to personal property. The legislative and judicial history of
depreciation, depreciation recapture, and Investment Tax Credit (ITC) are closely related.
Accordingly, much of the discussion will focus on the rules and decisions impacting several
interrelated Code sections (including ITC that was generally terminated in 1986). By es-
tablishing a legal framework for § 1245 and § 1250 property, examiners will have a better
365
understanding of this issue and have a basis for determining property classifications and
cost allocations.
The Internal Revenue Code (IRC) has historically authorized depreciation as an
allowance for the exhaustion, wear and tear, and obsolescence of property used in a trade
or business or for the production of income (IRC § 167 and the regulations thereunder).
Several different methods are described for calculating depreciation under IRC §§ 167 and
168, including straight line, declining balance, sum-of-the-years digits, and income fore-
cast. The deduction has generally been calculated with respect to the adjusted basis and
useful life of (or recovery period for) the property and by utilizing an appropriate deprecia-
tion method. At one time, salvage value was also a factor in the computation. The shorter
the useful life (or recovery period), the larger the current tax deduction, thus providing an
incentive for tax purposes. Buildings and structural components have substantially longer
depreciable lives than personal property. Therefore, it is desirable for taxpayers to maxi-
mize personal property costs in order to accelerate depreciation deductions and, hence,
reduce tax liability. The remainder of this chapter provides a brief historical perspective of
the statutes, rulings and major court cases that relate to depreciation and cost segregation
studies.
Bulletin F
Many attempts have been made to provide bright-line tests for classifying property
by its useful life (or recovery period) due to the frequent controversies that have arisen with
the determination of economic life. For example, IRS Publication Number 173 (also known
as “Bulletin F”) was published in 1942 and provided a useful life guide for various types of
property based on the nature of a taxpayer’s business or industry. Bulletin F identified over
5,000 assets used in 57 different industries and activities and described two procedures for
computing depreciation for buildings:
1. Composite Method:A depreciation chart provided a composite rate for
buildings, including all installed building equipment. The recom-
mended rates ranged from 1.5% per year for good quality warehouses
and grain elevators to 3.5% per year for inexpensive theaters.
2. Component Method: Taxpayers could elect to depreciate the building

equipment separately from the structure itself. A list provided lives
for various types of structures, ranging from 50 years for apartments,
hotels, and theaters, to 75 years for grain elevators and warehouses.
A separate list provided lives for over 100 items of installed building
equipment, ranging from 5 to 25 years, or the life of the building.
Regulation § 1.167(a)-7(a) allows taxpayers to either depreciate individual items
on a separate basis or to combine assets into group accounts and depreciate the group
account as a single asset. Historically, some taxpayers have interpreted this to mean that
assets can be segregated into components and depreciated separately.
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Component Depreciation
In 1959, the Tax Court recognized the right of taxpayers to calculate depreciation
using a component method for newly constructed property Shainberg vs. Commissioner, 33
T.C. 241 (1959). While the building shell was given a useful life of 40 years, the plumbing,
wiring, and elevators were assigned a life of 15 years, and the paving, roof, and heating
and air conditioning systems were given a useful life of 10 years.
Revenue Procedure 62-21, 1962-2 C.B. 418, superseded Bulletin F and provided
safe harbor useful lives based on industry-specific asset classes for taxpayers that met the
reserve ratio test (a complex provision). As long as the taxpayer could demonstrate that
its retirement policies were consistent with the selected class life, the Service would not
challenge the useful life. The asset class for buildings included “…the structural shell of
the building and all integral parts thereof…”, as well as equipment which services normal
heating, plumbing, air conditioning, fire prevention and power requirements, and equip-
ment such as elevators and escalators. Except to the extent the class lives were incorpo-
rated into the Class Life Asset Depreciation Range System (ADR), this revenue procedure
was revoked for all years after 1970.
Revenue Ruling 66-111, 1966-1 C.B. 46 (subsequently modified by Revenue Rul-
ing 73-410, 1973-2 C.B. 53), addressed the use of component depreciation for used real
property, in light of the decision in Shainberg. The ruling concluded that “When a used
building is acquired for a lump sum consideration, separate components are not bought; a
unified structure is purchased… Accordingly, an overall useful life for the building must be
determined on the basis of the building as a whole.”
Revenue Ruling 68-4, 1968-1 C.B. 77, concluded that the asset guideline classes
outlined in Revenue Procedure 62-21 “…may only be used where all the assets of the
guideline class (building shell and its components) are included in the same guideline class
for which one overall composite life is used for computing depreciation.”
Asset Depreciation Range (ADR)

The elective ADR system was developed for tangible assets placed in service after
1970, with the intent of minimizing controversies about useful life, salvage value, and
repairs. It also abolished the controversial reserve ratio test. Under the ADR system as
enacted by former IRC § 167(m) and implemented by Revenue Procedure 72-10, 1972-1 C.
B. 721, all tangible assets were placed in one of the more than 100 asset guideline classes
(which generally corresponded to those set out in Rev. Proc. 62-21). The classes of assets
were based on the business and industry of the taxpayer. In addition, each class of assets
other than land improvements and buildings was given a range of years (called “asset
depreciation range”) that was about 20 percent above and below the class life. As long as
taxpayers did not deviate from this range in useful lives, the Service would not challenge
the useful life. An optional repair allowance method was also permitted at the election of
the taxpayer.
If the taxpayer did not elect the ADR system, Revenue Ruling 73-410, 1973-2 C.B.
53, clarified that a taxpayer may utilize the component method of depreciating used prop-
erty if a qualified appraiser “…properly allocates the costs between non-depreciable land
and depreciable building components as of the date of purchase.”
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Accelerated Cost Recovery System (ACRS)

Issues involving salvage value and useful life continued to arise, as well as contro-
versy regarding the repair allowance, so Congress enacted IRC § 168 in 1981 (generally
effective for property placed in service after December 31, 1980). The Accelerated Cost
Recovery System (ACRS) was intended to provide a less complicated method for comput-
ing depreciation (known as “cost recovery”) by eliminating salvage value and specifying
recovery periods for various classes of assets. Depreciation deductions were calculated
based on the applicable depreciation methods, recovery periods and placed-in-service
conventions outlined in § 168. In contrast to the elective ADR system, ACRS was manda-
tory and provided only five (later six) recovery periods. ACRS also allowed for a faster
write-off of assets than had been allowed under previous rules (e.g., the 40-year life for
real property was reduced to either a 15, 18, or 19-year recovery period, as reflected by the
1985 amendments to ACRS).
Modified Accelerated Cost Recovery System (MACRS)

Significant modifications, generally less favorable to taxpayers, were made to ACRS
by the Tax Reform Act of 1986 (effective for property placed in service after December 31,
1986). Under the Modified Accelerated Cost Recovery System (MACRS), the recovery pe-
riod for buildings and structural components increased dramatically. For example, the 15,
18, or 19-year recovery periods for real property are now 39 years for nonresidential real
property (or 31.5 years for nonresidential real property placed in service by the taxpayer
before May 13, 1993) and to 27.5 years for residential rental property, under the general
depreciation system of § 168(a). Equipment and machinery generally fall into the 3, 5, or
7-year recovery periods. Land improvements generally have a 15-year recovery period
under the general depreciation system of § 168(a). The wide gap in MACRS recovery peri-
ods provides a strong incentive for taxpayers to allocate or reallocate costs of long- lived
property to short-lived property, wherever possible.
Revenue Procedure 87-56, 1987-2 C. B. 674, provides the class lives and recovery
periods for most MACRS assets. These determinations are based on the specific industry
of a taxpayer and the specific activity for which the assets are used. But see discussion of
Duke Energy Natural Gas Corporation v. Commissioner, 109 T.C. 416 (1997), rev’d, 172
F.3d 1255 (10th Cir. 1999), nonacq., 1999-2 C.B. xvi; Saginaw Bay Pipeline Co., et al v.
United States, 124 F. Supp. 2d 465 (E.D. Mich. 2001), rev’d and rem’d, 2003 FED App.
0259P (6th Cir.) (No.01-2599); and Clajon Gas Co. LP, et al v. Commissioner, 119 T.C.
197 (2002), rev’d, 2004 U.S. App. LEXIS 284 (8th Cir. Mo. Jan. 12, 2004), and Revenue
Ruling 2003-81, 2003-2 C.B. 126, on page 6.3-10. Appendix Chapter 6.3 provides an over-
view of recovery period determinations.
Expensing Provisions and Bonus Depreciation—IRC §§ 168, 179, And

1400l
Another incentive for allocating costs to shorter-lived property is the expensing
provision of IRC § 179. The ceiling limitation for expensing capital amounts invested in
qualifying section 179 property (qualifying tangible personal property acquired by pur-
chase for use in the active conduct of a trade or business) has steadily increased over time,
368
from $10,000 to over $25,000 per year ($100,000 per year, adjusted annually for inflation,
for certain qualifying property placed in service for taxable years beginning after Decem-
ber 31, 2002, and before January 1, 2008). By maximizing the costs allocable to tangible
personal property, the taxpayer can not only get an immediate write-off under § 179, but
also qualifies for a shorter recovery period under § 168 for any remaining basis in the
property. Also, the 30-percent additional first year bonus depreciation allowance pursuant
to § 168(k), enacted by the Job Creation and Worker Assistance Act of 2002 (Public Law
107-147), provides even further incentive for taxpayers to segregate property into shorter
recovery periods. The Jobs and Growth Reconciliation Tax Act of 2003 recently increased
the bonus depreciation under § 168(k) to 50 percent for certain qualifying property ac-
quired after May 5, 2003, and placed in service before January 1, 2005 (January 1, 2006,
for certain property with a longer production period). Code section 1400L provides special
rules for qualifying property used by a business in the New York Liberty Zone. Also, Code
section 1400N, as enacted by the Gulf Opportunity Zone Act of 2005, extends some of
the rules to property acquisitions after August 28, 2005, and before December 31, 2007,
(December 31, 2008, for residential rental and nonresidential real property), for use in
areas impacted by Hurricanes Katrina, Rita, and Wilma.
What Is Tangible Personal Property?

While § 167 provides an allowance for depreciation for both tangible and intan-
gible property, § 168 (as written) only applies to tangible property. Since neither § 167 nor
§ 168 provides a definition of tangible property, one must look to § 48 and the regulations
thereunder (prior to the passage of Public Law 101-508) for definitions and examples of
tangible property (as well as for buildings and structural components). This area will be
discussed further in the following sections.
Investment Tax Credit—IRC § 48

In order to stimulate the economy, Congress enacted Code § 48 in 1962. The
ITC was designed to encourage the modernization and expansion of productive facilities
through the purchase of certain new or used assets for use in a trade or business. Section
48 generally allowed a tax credit for investment in tangible depreciable property placed
in service during the taxable year. The amount of the credit was the “applicable percent-
age” of the investment in qualifying property placed in service during the taxable year,
depending on the useful life of the property and whether it was new or used when acquired.
The percentage was initially 7 percent but was later increased to 10 percent (Revenue Act
of 1978). The amount of the qualifying investment was limited and the ITC was subject
to recapture if the property was not held for its entire useful life. Over the years, many
other changes were made to the rules, including reductions in the depreciable basis of
property for which ITC was claimed, temporary suspensions, termination, reinstatement,
and, ultimately, the general repeal of ITC in 1986. Most of these revisions were related to
the perceived economic needs of the country at the time they were enacted.
369
Tangible Personal Property

Eligible ITC property is defined in former IRC § 48(a)(1) with reference to IRC § 38
(in fact, eligible property is often referred to as “section 38 property”). It included tangible
personal property (other than heating or air conditioning units) and other tangible property
(primarily machinery and equipment) that was closely integrated into the taxpayer’s trade
or business. Land, buildings, structural components contained in or attached to buildings,
and other inherently permanent structures, generally were not eligible for ITC. Local law
was not controlling with regard to property qualifying as tangible personal property for
purposes of ITC.
Treas. Reg. § 1.48-1(c) provides examples of qualifying property, and states that
…“tangible personal property” means any tangible property except land and improve-
ments thereto, such as buildings or other inherently permanent structures (including items
which are structural components of such buildings or structures).
This same subsection states that “tangible personal property” includes
…all property (other than structural components) which is contained in or attached
to a building. Thus, such property as production machinery, printing presses, transporta-
tion and office equipment, refrigerators, grocery counters, testing equipment, display racks
and shelves, and neon and other signs, which is contained in or attached to a building
constitutes tangible personal property for purposes of the credit allowed by section 38.
Furthermore, all property that is in the nature of machinery (other than structural compo-
nents of the building or other inherently permanent structure) shall be considered tangible
personal property even though located outside a building. Thus, for example, a gasoline
pump, hydraulic car lift, or automatic vending machine, although annexed to the ground,
shall be considered tangible personal property.
In addition, the regulations provide examples of non-qualifying property. For ex-
ample, “…buildings, swimming pools, paved parking areas, wharves and docks, bridges,
and fences are not tangible personal property.”
The Senate Report accompanying the enactment of the Revenue Act of 1978 provid-
ed additional insight into Congressional intent by providing further examples of qualifying
and non-qualifying property.
…[T]he committee wishes to clarify present law by stating that tangible personal
property already eligible for the investment tax credit includes special lighting (including
lighting to illuminate the exterior of a building or store, but not lighting to illuminate park-
ing areas), false balconies and other exterior ornamentation that have no more than an
incidental relationship to the operation or maintenance of a building, and identity symbols
that identify or relate to a particular retail establishment or restaurant such as special
materials attached to the exterior or interior of a building or store and signs (other than
billboards). Similarly, floor coverings which are not an integral part of the floor itself
such as floor tile generally installed in a manner to be readily removed (that is it is not
cemented, mudded, or otherwise permanently affixed to the building floor but, instead, has
adhesives applied which are designed to ease its removal), carpeting, wall panel inserts
such as those designed to contain condiments or to serve as a framing for picture of the
products of a retail establishment, beverage bars, ornamental fixtures (such as coats-of-
370
arms), artifacts (if depreciable), booths for seating, movable and removable partitions, and
large and small pictures of scenery, persons, and the like which are attached to walls or
suspended from the ceiling, are considered tangible personal property and not structural
components. Consequently, under existing law, this property is already eligible for the ITC.
[S. Rep. No. 1263, 95th Cong., 2d Sess. 117 (1978), reprinted in 1978-2 C.B. Vol.
1 315,415.]
Buildings and Structural Components

Treas. Reg. § 1.48-1(e)(1) provides a detailed explanation of buildings and their
structural components for ITC purposes and has been the primary source for guidance,
both with respect to component depreciation and cost segregation studies. The term “build-
ing” is described as
…any structure or edifice enclosing a space within its walls and usually covered by
a roof whereby the structure improves the land, and provides shelter or housing for work,
office, display, or sales space. The term includes, for example, structures such as apartment
houses, factory and office buildings, warehouses, barns, garages, railway or bus stations,
and stores. Such term includes any such structure constructed by, or for, a lessee even if
such structure must be removed, or ownership of such structure reverts to the lessor, at the
termination of the lease.
Specifically excluded from the definition of the term “building” are the following:
i. a structure which is essentially an item of machinery or equipment, or
ii. a structure which houses property used as an integral part of an activity
specified in section 1.48(a)(1)(B)(i) if the use of the structure is so closely
related to the use of such property that the structure clearly can be expect-
ed to be replaced when the property it initially houses is replaced. Factors
which indicate that a structure is closely related to the use of the property
it houses include the fact that the structure is specifically designated to
provide for the stress and other demands of such property and the fact that
the structure could not be economically used for other purposes.
The term “structural components” is defined in § 1.48-1(e)(2) of the Regulations as
…includes such parts of a building as walls, partitions, floors, and ceilings, as
well as any permanent coverings therefore such as paneling or tiling; windows and doors;
all components (whether in, on, or adjacent to the building) of a central air condition or
heating system, including motors, compressors, pipes and ducts; plumbing and plumb-
ing fixtures, such as sinks and bathtubs; electric wiring and lighting fixtures; chimneys;
stairs, escalators, and elevators, including all components thereof; sprinkler systems; fire
escapes; and other components relating to the operation or maintenance of a building.
However, the term “structural components” does not include machinery the sole
justification for the installation of which is the fact that such machinery is required to
meet temperature or humidity requirements which are essential for the operation of other
machinery or the processing of materials or foodstuffs. Machinery may meet the “sole
371
justification” test provided by the preceding sentence even though it incidentally provides
for the comfort of employees, or serves, to an insubstantial degree, areas where such tem-
perature or humidity requirements are not essential. For example, an air conditioning and
humidification system installed in a textile plant in order to maintain the temperature or
humidity within a narrow optimum range which is critical in processing particular types of
yarn or cloth is not included within the term “structural components”.
Section 1245 and Section 1250 Property

The benefits of the ITC were somewhat offset by the provisions of IRC §§ 1245 and
1250, also enacted in 1962. These Code sections result in the conversion of capital gain to
ordinary income on the disposition of a property, to the extent its basis has been reduced
by an accelerated depreciation method. The definitions of property for purposes of §§ 1245
and 1250 are very similar to that for ITC and make reference to the regulations under § 48
and the definitions under § 38 property. These interrelated Code sections and the regula-
tions (38, 48, 1245 and 1250) provide the pertinent authority for determining eligibility
for ITC. They also determine eligibility for the immediate write-offs under section 179,
the appropriate recovery periods for depreciation (§§ 167 and 168) and for depreciation
recapture upon a disposition.
The primary issue in cost segregation studies is the proper classification of assets
as either § 1245 or § 1250 property. Accordingly, the ITC rules are critical in determining
whether a taxpayer has classified property into the appropriate asset class.
Section 1245(a)(3) provides that “section 1245 property” is any property which
is or has been subject to depreciation under § 167 and which is either personal property
or other tangible property used as an integral part of certain activities. Such activities
include manufacturing, production or extraction; furnishing transportation, communica-
tion, electrical energy, gas, water, or sewage disposal services. Certain other “special use”
property also qualifies as § 1245 property, but is not of a primary concern for purposes of
this discussion. It is important to note that § 1245(a)(3) specifically excludes a building or
its structural components from the definition of § 1245 property.
Treas. Reg. § 1.1245-3 defines “personal property,” “other tangible property,”
“building,” and “structural component” by reference to Treas. Reg. § 1.48-1. As pre-
viously discussed, those regulations (§ 1.48-1) provide definitions of tangible personal
property that qualifies as § 38 property for ITC.
Section 1250(c) defines “section 1250 property” as any real property, other than
section 1245 property, which is or has been subject to an allowance for depreciation. In
other words, § 1250 property encompasses all depreciable property that is not § 1245
property.
Land improvements (i.e., depreciable improvements made directly to or added to
land), as defined in Asset Class 00.3 of Rev. Proc. 87-56, may be either § 1245 or § 1250
property and are depreciated over a 15-year recovery period. Buildings and structural
components are specifically excluded from 15-year property. Examples of land improve-
ments include sidewalks, roads, canals, waterways, drainage facilities, sewers, wharves
and docks, bridges, fences, landscaping, shrubbery, and radio and television towers. Note
that some activity asset classes also include land improvements such as asset class 57.1 of
Rev. Proc. 87-56.
372
From a statutory standpoint, the primary test for determining whether an asset is §
1245 property eligible for ITC is to determine whether or not it is a structural component
of a building. In other words, if an asset is not a structural component of a building, then
it can be considered to be § 1245 property. The structural component determination hinges
on what constitutes an inherently permanent structure and how permanently the asset is at-
tached to such a structure. Clearly, this is a factually intensive determination and explains
the lack of bright-line tests for segregating property into § 1245 and § 1250 classifications.
Functional Use Test

The early administrative rulings on ITC focused on a “functional use test” to de-
termine whether an asset constituted § 1245 property. Rather than examining the inherent
permanency characteristics of the asset, the test evaluated the purpose for which the asset
was used. For example, if the asset served a function normally attributable to a structural
component or permanent structure, it was not treated as tangible personal property even if
it could be moved. However, following several conflicting court decisions which addressed
the inherent permanency of particular assets, the Service shifted its focus from the func-
tional use test to an evaluation of factors indicating inherent permanency.
Inherent Permanency Test and the “Whiteco Factors”

Revenue Ruling 75-178, 1975-1 C.B. 9 outlined several criteria to determine §
1245 property classification. These criteria included (1) whether the asset is movable or
removable; (2) how the asset is attached to real property; (3) the design of the asset; and
(4) whether the asset bears a load.
The classic pronouncement addressing inherent permanency was Whiteco Indus-
tries, Inc. v. Commissioner, 65 T.C. 664, 672-673 (1975). The Tax Court, based on an
analysis of judicial precedent, developed six questions designed to ascertain whether a
particular asset qualifies as tangible personal property. These questions, referred to as the
“Whiteco Factors,” are:
1. Can the property be moved and has it been moved?
2. Is the property designed or constructed to remain permanently in place?
3. Are there circumstances that show that the property may or will have to be
moved?
4. Is the property readily movable?
5. How much damage will the property sustain when it is removed?
6. How is the property affixed to land?
It should also be noted, however, that moveability is not the only determinative
factor in measuring inherent permanency. In L.L. Bean, Inc. v. Comm., T.C. Memo. 1997-
175, aff’d, 145 F.3d 53 (1st Cir. 1998), it was determined that, even though the structure
could be moved, it was designed to remain permanently in place. Thus, it was determined
to be an inherently permanent structure.
373
Examiners should also consider the following points when addressing the Whiteco
factors:
• The manner in which an item is attached to a building or to the land,
• The weight and size of the item,
• The time and costs required to move the components,
• The number of personnel required in planning and executing a move,
• The type and quantity of equipment required for a move,
• The history of the item or similar items being moved,
• The time, cost, manpower and equipment required to reconfigure the existing
space if the item is removed,
• Any intentions regarding the removal,
• Whether the item is designed to be moved, and
• Whether the item is readily usable in another location.
Repeal of ITC and Component Depreciation

Due to the significant tax benefits derived from ITC-eligible property, the use of
component depreciation proliferated during the 1970’s and created problems not unlike
those faced today by taxpayers, practitioners, and the Service regarding cost segregation
studies. The problem became so pronounced during the late 1970’s that Congress disal-
lowed component depreciation as a method of computing depreciation for buildings, simul-
taneously with the enactment of ACRS in the Economic Recovery Tax Act of 1981 (ERTA)
[see IRC § 168(f)(1)]. In addition to the controversies surrounding the determination of
qualifying § 1245 property, the driving force behind this action was the disadvantage suf-
fered by smaller taxpayers that could not afford to have expensive ITC studies performed.
In 1986, MACRS reiterated that the use of component depreciation was not al-
lowable. Section 168(i)(6) provides that depreciation for any addition or improvement to
property shall be computed in the same manner as the depreciation for the underlying
property, as if the underlying property had been placed into service at the same time.
[Prior to 1981, an asset composed of separately replaceable components could have been
fragmented for depreciation purposes even though the interdependent components were
parts of an integrated whole.].
Hospital Corporation of America v. Commissioner (“HCA”) (1997)

A recent landmark decision, Hospital Corporation of America v. Commissioner,
109 T.C. 21 (1997)(“HCA”), provided the legal support to use cost segregation studies
for computing depreciation. In effect, this decision has reinstated a form of component
depreciation.
374
In HCA, the Service took the position that certain property items were structural
components of a building and that § 168(f)(1) prohibited the use of a component deprecia-
tion method for computing depreciation on buildings (including structural components).
The Service also argued that § 168(f)(1) effectively changed the definition of tangible per-
sonal property for ACRS purposes (i.e., after the enactment of ACRS in 1981) by excluding
any item attached to the building from being § 1245 property. Accordingly, the prohibition
against component depreciation precluded an item from being treated as § 1245 property if
it was attached to a building and had utility beyond its relationship to the particular piece
of property.
However, Judge Wells ruled that the property at issue was § 1245 property and
rejected the Service’s argument that findings based on Treas. Reg. § 1.48-1(e) were inap-
plicable following the enactment of ACRS in 1981. Based on his review of the statutory
and regulatory language, as well as case law, Judge Wells concluded that the enactment of
ACRS did not redefine § 1250 property to include property that had been § 1245 property
for purposes of ITC. Accordingly, the court determined that §168(f)(1), prohibiting compo-
nent depreciation, applied only to §1250 property.
The HCA ruling effectively reinstated a form of component depreciation for certain
building support systems, such as the electrical and plumbing systems that directly serve
tangible personal property. Therefore, cost segregation methodologies previously used to
allocate the cost of a building between structural components and ITC property can now
be used for § 1245 and § 1250 property.
Action on Decision
The Service did not appeal HCA since it could not state that the court’s reasoning
and decision were clearly erroneous. In an Action on Decision (AOD CC-1999-008), the
Service acquiesced to the validity of the method approved by the court (i.e., pre-1981 ITC
tests remained applicable for determining tangible personal property under both ACRS
and MACRS). However, the Service non-acquiesced to the court’s findings as to which
specific assets qualified as tangible personal property. Two cases, LaPetite Academy and
Boddie-Noell, were specifically referenced in the AOD with respect to the determination of
structural components and tangible personal property. In Boddie-Noell Enterprises, Inc.
v. United States, 36 Fed. Cl. 722 (1996), aff’d without op., 132 F.2d 54 (Fed Cir. 1997),
the court held that acoustical tile ceilings, a portion of an electrical system and a plumbing
system were structural components under the regulations. In LaPetite Academy, Inc. v.
United States, 95-1 U.S.T.C. (CCH) 50,193 (W.D. Mo. 1995) aff’d without op., 72 F.2d 133
(8th Cir. 1995), wall panels, kitchen plumbing, bathroom accessories and a portion of the
electrical system were held to be structural components under the regulations.
Chief Counsel Guidance

Chief Counsel issued further guidance to the field in the form of an advice memo-
randum dated May 28, 1999. It made the following observations and recommendations for
field agents examining cost segregation studies:
375
• The determination of whether an asset is a structural component or tangible

personal property is a facts-and-circumstances assessment.
• The use of cost segregation studies must be specifically applied by the taxpayer.
• Allocations must be based on a “logical and objective measure” of the por-
tion of the equipment that constitutes § 1245 property.
• An accurate cost segregation study may not be based on non-contemporane-
ous records, reconstructed data, or taxpayer’s estimates or assumptions that
have no supporting records.
• Cost segregation studies should be closely scrutinized by the field.
• A change in depreciation method is a change in method of accounting, requir-
ing the consent of the Secretary or his delegate.
[Note, however, that the recent 5th Circuit opinion in Brookshire Brothers Hold-
ing, Inc. & Subsidiaries v. Commissioner, 320 F.3d 507 (5th Cir. 2003), aff’g T.C. Memo.
2001-150, reh’g denied (March 31, 2003), which was adverse to the Service, may impact
cases in that circuit. The court affirmed the Tax Court decision that the regulations allow
taxpayers to make temporal changes in their depreciation schedules, as well as changes
in the classification of property, without the consent of the IRS. However, the 10th Circuit
opinion in Kurzet v. Commissioner, 222 F.3d 830 (10th Cir. 2000), was favorable to the
government on this issue. Clearly, the issue is unsettled. However, Treas. Reg. § 1.446-
1T(e)(2)(ii)(d)(2)(i), effective for taxable years ending on or after December 30, 2003,
provides that a change in the depreciation or amortization method, period of recovery, or
convention of a depreciable or amortizable asset is a change in method of accounting. See
Example 9 of Treas. Reg. § 1.446-1T(e)(2)(iii), which specifically relates to changes based
on a cost segregation study. On January 28, 2004, Chief Counsel Notice CC-2004-007
was issued, setting forth Chief Counsel’s Change in Litigating Position on the application
of § 446(e) to changes in computing depreciation. Examiners may contact the Change in
Accounting Method Technical Advisors, for the most current information.]
Lack of Bright-Line Tests for Distinguishing § 1245 and § 1250 Property

A myriad of court cases has addressed the classification of property for ITC pur-
poses. All of the cases are factually-intensive and quite often the opinions of the courts
conflict. In addition, though the Service has issued numerous revenue rulings to address
specific fact patterns, no bright-line tests have evolved. Because of this problem, significant
controversy still exists regarding property classification for depreciation purposes.
SUMMARY AND CONCLUSIONS

This chapter has provided a legal framework for distinguishing § 1245 property
from § 1250 property and for determining appropriate recovery periods. It cannot be over-
emphasized that the classification of assets is a factually intensive determination. Based
on HCA, the recent AOD, and the 1999 Chief Counsel Advice Memorandum, the use of
cost segregation studies is expected to increase. Thus, examiners need to examine and
376
evaluate a cost segregation study in light of the applicable statutes and judicial precedent
established for a similar fact pattern.
SUMMARY
ASA offers a designation in Cost Survey, which covers the performance of Cost
Segregation (CS) studies. This chapter is a brief introduction to CS, which allows taxpay-
ers to increase their accelerated depreciation.
The IRS has issued the Cost Segregation Audit Techniques Guide, outlining what a
CS study should entail and what assets can qualify for the faster depreciation; it has been
partially reproduced in this chapter with permission from the IRS.
377
18
International Machinery and
Equipment Valuations
Objectives:
1. Provide an overview of valuation procedures used in various parts of the
world.
2. Discuss the differences among valuation procedures used in various parts

of the world.
3. Provide guidance as to which appraisal procedures are common and

appropriate in various parts of the world.
Introduction
The need for international valuations has increased significantly in recent years,
due to increased interest by United States companies in foreign manufacturing, coupled
with ever-increasing desire by foreign companies to invest in United States companies.
This chapter describes the process of appraising machinery and equipment in vari-
ous countries and geographical regions outside the United States, utilizing a number of
techniques that are familiar to MTS appraisers in the United States, and contrasts those
procedures with those used outside the United States. The basic valuation concepts and ap-
proaches that generally are employed by appraisers in various parts of the world today will
be described.1 This chapter also elaborates on how valuation professionals have been able
to extend their practice to many parts of the world, and how much of this expansion is be-
ing caused by the increasing number of emerging companies and their use of international
finance standards. Appraisal professionals from the United States have assisted emerging
countries though offerings of basic valuation courses by appraisal societies and colleges
and universities.
Background
For many years, some of the most populated and industrialized countries in the
world, such as Russia and China, did not have a free-market economy, and therefore had
no need for the services of appraisers. This changed in 1989 when the “wall” surround-
ing Eastern Europe opened to the West. Within several months, the need for valuations
dramatically increased in Eastern Europe, the former Soviet countries, and the People’s
Republic of China.
The worldwide appraisal profession has undergone a major transformation during
the past 10–20 years. This transformation is driven primarily by valuation requirements in
378
International Machinery and Equipment Valuations
the former Soviet Union countries and China, and in turn has resulted in an increased need
to provide educational offerings to train appraisers in many countries that suddenly found
themselves in need of professional appraisals.
This rapid development of the valuation profession outside of the previously ma-
ture markets that existed in the West initiated a spread of basic valuation knowledge to
virtually all parts of the world today. ASA has witnessed a dramatic increase in providing
basic valuation courses in various parts of the world through the traditional classroom
environment, via distance learning on the internet, or through correspondence courses.
This dramatic increase in education and training of appraisers throughout the world has
elevated the appraisal profession in many countries, so that the basic valuation concepts
that have existed in the United States for many years are now more readily understood and
practiced in many other countries. It has made the appraiser a well-paid and sought-after
professional in many parts of the world.
Basic Valuation Approaches and Concepts

The appraisal profession in the United States and Canada, Western Europe, Aus-
tralia, and most of South and Central America uses the cost, sales comparison, or income
approach to value, as described elsewhere in this book. For many years, MTS appraisers
in countries in these parts of the world relied largely on the cost and sales comparison
approaches to value. As a result of increased awareness and education, these appraisers
gained an increased understanding of the basic concepts of the income approach, and it is
becoming more widely used in the valuation of machinery and equipment.
However, in those countries whose free-market economies are still developing and
in other parts of the world, the cost approach is the most commonly used approach to value.
Since the cost approach is especially useful in valuing special-purpose property or property
for which no market exists, it becomes the primary approach to value in those countries
where reliable market data does not exist. In a country with no market economy, economic
obsolescence is not used and the value is primarily derived used physical and functional
obsolescence attributes which are typically understood and teachable.
Basic Concepts of Valuation

Appraisers throughout the United States and Canada, Western Europe, Australia,
and most of South and Central America typically use various basic definitions of valuation
such as reproduction cost new, replacement cost new, fair market value (FMV) in use,
fair market value in exchange, fair market value installed, orderly and forced liquidation
value, auction value, liquidation in place, salvage, and scrap value.2 The rest of the world
typically has been using some form of reproduction cost new or replacement cost new,
but these areas now are moving toward the use of the other definitions of value that have
been used for many years in developed countries. This change is gaining impetus from the
increase in business asset transfer activities and the increasing need to know the value of
assets for various purposes and at various levels of trade.
Valuation Techniques
In the United States, the valuation profession dates back to the late 1890s. Virtually
all appraisal work prepared in the first half of the 20th century was done for insurance-re-
lated purposes. Appraisers were trained by appraisal or insurance companies, using appren-
379
ticeship programs that lasted as long as five years. Nonetheless, few standardized appraisal
techniques and very little uniformity for machinery and equipment has been developed.
In Chapter 2, two major procedures used in the identification and listing of ma-
chinery were discussed—macroidentification and microidentification. These two listing
and valuation techniques are widely used in most developed countries today, and their
underlying principles are beginning to be accepted practice for most valuation assignments
in many developing countries. In addition to the techniques described in Chapter 2, valu-
ation through the sampling or appraising assets in groups (as discussed in Chapter 7) is
becoming more commonplace and accepted as a reasonable and credible approach.3 Some
of the specifics pertaining to valuations in various geographical areas are discussed in the
following sections.
Western Europe
The appraisal profession is highly developed in Western Europe. Both the macroi-
dentification and microidentification techniques often are used for the listing of assets, and
all of the traditional approaches to value are employed. There is an active used equipment
market, and published data for new and used prices can be obtained from original equip-
ment manufacturers, used equipment dealers, and published sources.
Although for most of Western Europe the currency is now the euro, a number of
other currencies still are being used. Care must be taken when making appropriate adjust-
ments for changes for the respective currencies, as the proper currency must correspond to
the appropriate country of origin of the major assets. Also, Western Europe is in the pro-
cess of adopting a mark-to-market accounting basis that may cause adjustments to existing
historical cost data. The appraiser may need to consider this carefully if asset records are
utilized.
Eastern Europe Including Russia

In Eastern Europe, including Russia, much of the processes are similar to those
used in the United States. The microidentification technique generally is used in Eastern
Europe for major assets, and often only major assets are listed and verified for valuation
purposes. Minor assets typically are accounted for on a group basis, and the sampling or
grouped assets approach is commonly used for these.
New prices for equipment are available from some local manufacturers. Although
not yet mature, there is an active emerging market for a wide variety of used manufacturing
machinery and equipment and office furniture and equipment markets. Caution and judg-
ment must be exercised for tangible assets purchased prior to 1999 because those assets
did not reflect actual market-derived (or competitive) prices, but rather an allocated or
estimated price or value at the time the company was privatized. Unfortunately, the market
for used machinery and equipment is still very limited and will take some years to fully
develop.
Other issues that need to be considered for many of the former socialist countries
include high inflation, currency exchange considerations, and frequent currency revalua-
tions for accounting purposes, which impacts historical data and may require additional
scrutiny and adjustments.
380
Central and South America Including Mexico

For most appraisals in Central and South America and Mexico, the microidentifica-
tion technique often is used for all of the major assets, but typically only the major assets
are accounted for and valued individually. Minor assets typically are valued in relevant
groupings, if at all, because these tend to be expensed by the companies and therefore
usually are not being tracked.
While prices for new equipment may be difficult to gather, clients often can pro-
vide assistance in obtaining quotations for new equipment. Used-market data is difficult
to obtain, although there is some data on the internet that can be useful. Machinery and
equipment often is sold or transferred to these regions from the United States and Canada.
Therefore, North American sales data often may be appropriate to use, although adjust-
ments may be warranted to reflect differing economic factors and relative currency values.
Other issues that need to be considered for Central and South America and Mexico
include high inflation, currency exchange considerations, and frequent currency revalua-
tions for accounting purposes, which impacts historical data and may require additional
scrutiny and adjustments.
Another approach often used is the sampling technique, using existing fixed-asset
records combined with an actual physical verification of the major units during an inspec-
tion of the facility. The existing asset file then becomes the basis for the valuation. Data
collected from previous purchases (and possibly previous valuations) forms a data base
and an index is developed from that data to adjust the cost basis of similar units.
Asia, Japan, and India

In Asia, Japan, and India, two common approaches are used to value machinery
and equipment. One approach uses the macroidentification technique, with only the major
machinery and equipment units being inventoried. In this approach, locally manufactured
equipment prices are obtained from local dealers and the respective manufacturers, much
like the process used in the United States. However, in these geographical areas much
of the machinery and equipment utilized generally is imported from various other coun-
tries, making it difficult to obtain current local replacement cost new data, because many
manufacturers do not have local representatives or equipment dealers. Some prices for
new equipment in these areas may be found in published data or on Websites. However,
prices for used equipment are difficult to obtain because of a lack of established secondary
or used markets, although some used equipment dealers can provide used machinery and
equipment prices. In any event, care must be exercised when obtaining and using such
data to make sure it is verifiable. Because of these factors, often the historical cost must be
used as the basis to determine the current reproduction or replacement cost, and then the
appropriate adjustments must be made for differences in currencies and exchange rates.
In Asia, Japan, and India, typically minor items are not inspected or verified, and
the various sampling techniques are applied, using the appraising assets in groups tech-
niques described in Chapter 7.
Another sampling technique approach often used in these geographical areas is
the use of existing fixed-asset records, combined with a verification of the major units
during a plant inspection. The existing asset file then becomes the basis for the valuation.
It sometimes is necessary to utilize data collected from previous purchases (and possibly
381
previous valuations) to form a data base, and an index is developed from that data to adjust
the cost basis of similar units.
Global Expansion of Appraisal Practice Beyond the Current Emerging

Markets
The continued trend for forming a global economy will continue to provide chal-
lenges and opportunities for assisting these countries to understand and enter into these
markets. It is highly likely that these same appraisal issues will continue to need to be ad-
dressed. Historically the same evolutionary patterns seem to be repeated as new countries
enter the global economy, so sound and proven valuation techniques need to continue to be
practiced and taught.
International Considerations
It can be seen from the preceding discussion that MTS valuations performed out-
side the United States involve many of the same issues faced by appraisers in the United
States. However, the main challenge is the availability of verifiable data, and therefore
modified valuation techniques may need to be relied on. Some of these challenges include:
• The need to know local business customs
• Learning how and where to gather required information
• Becoming familiar with local market influences (if they exist)
• Becoming familiar with international and/or local accounting and valuation
standards (if required)
• Aligning oneself with the client in order to access the client’s resources and
connections for information
In countries with well-developed industrial bases and active used markets for in-
dustrial equipment (e.g., Western Europe, Australia) the sales comparison approach can
be utilized, along with the cost and income approaches. However, in developing countries
and in countries that have not established active used markets for industrial equipment
and recently have developed a freer economy (e.g., most of Eastern Europe), appraisers
primarily have had to rely on the cost approach in order to develop their opinions of value.
Valuations in countries outside the United States often are performed using exist-
ing fixed-asset records.4 If the MTS appraiser utilizes a fixed-asset record, it becomes
extremely important that the appraiser understand what the data represents and the indi-
vidual company’s accounting booking policy. This data can or cannot be utilized to pro-
duce a credible valuation. Valuing a company’s assets utilizing a fixed-asset record does
not preclude the appraiser from performing adequate due diligence. The actual steps that
need to be taken in order to perform adequate due diligence rest solely with the individual
appraiser.5 Ultimately it is the appraiser’s responsibility to determine the extent and depth
of verification that needs to be done to fulfill the obligation to meet the scope of work.
Some of the processes that may be required in order to perform international appraisals of
machinery and equipment could entail:
• Compiling a questionnaire for the proper parties to obtain all of the critical
information that may need to be gathered
382
• Determining the accuracy of any accounting records and establishing when

the last reconciliation between the asset records and the equipment that may
actually exist was performed
• Translating into English and explaining all or the major line items in the
fixed-asset records (as applicable)
• Understanding the original and/or historical cost information and what it
represents
• Telephone and e-mail interviews to assure the appraiser that the asset records
and other data provided are credible and in sufficient detail for the basis of an
appraisal
Financial Reporting Differences

It is important that the MTS appraiser recognize that, up until recently, each country
had its own accounting and asset-tracking requirements. In many cases, these requirements
were significantly different from those used in the United States. Other countries do not
utilize Generally Accepted Accounting Principles (GAAP), and instead many use the Inter-
national Accounting Standards (IAS). Under the guidance of the International Accounting
Standards Board (IASB) most countries are now adopting the International Financial Re-
porting Standards (IFRS), which are meant to achieve a degree of international uniformity
and conformity with the IAS. However, because these standards are relatively new to many
of the developing economies, previous methodologies still may be used, and care must be
taken to understand them before undertaking any international appraisal assignments.
Some of the items that may vary from GAAP and require further investigation and
clarification include:
• Clarification of what accounting lives were utilized and their basis. In many
cases, the common practice is to use accounting lives that are much lower
than those utilized in the United States; this may result in some items being
depreciated faster than an MTS appraiser in the United States would expect.
• In some countries, it was or is customary to capitalize every item, regardless
of cost, and conversely in some other countries only items above a certain
very high threshold are capitalized.
• In some countries, it was or is customary to delete items from the asset records
once they reach a net book value of zero.
• Some companies which have headquarters or subsidiaries in more than one
country may maintain one set of accounting records for each country (the
parent as well as their parent country that they report to as a subsidiary), thus
causing different records and standards being applied to the same items.
• In some countries, assets are capitalized only once a year, and all of the assets
purchased in that year may be capitalized in a one-line entry instead of on
an-itemized basis.
• In certain countries (e.g., England) some companies record additions such as
repairs and additional equipment in a single entry and subtract retirements
383
from that same line entry instead of itemizing them individually. Thus, a line
item may be a conglomeration of a number of purchases and acquisition dates
and items related to a particular “parent” asset.
• In some Eastern European countries all businesses once were operated by
the government and asset accounting records were rarely if ever kept. Also,
in some Eastern European countries, the recorded “historical” cost and “his-
torical” date of acquisition on the asset records is rarely truly historic. The
recorded data may be from a variety of sources such as previous valuations,
estimates arrived at by company personnel on the date the company became
private, or by some other occurrence or purpose.
Trending
In many foreign countries, reliable trend data is not as plentiful as it is in the United
States. While the United States Bureau of Labor Statistics (BLS) tracks a wide variety
of categories and subcategories in the United States, other countries may only track one
or two indices. Also, many countries only track inflation factors in broad terms such as
“buildings,” “agricultural industry,” or “all other;” or they may track the consumer price
index but not any industrial indexes. Therefore, trend data should be utilized with caution
and only as a tool of last resort, and care must be taken to understand the makeup of any
index before utilizing it.
Also, in developing countries and countries that have wide swings in inflation and
large economic swings, trend data may be very erratic and therefore may not be usable.
If this is the case, the only options left to the MTS appraiser are to utilize gathered actual
replacement cost new data or to utilize the trend factors of some other country.6
Because it is very common for companies outside the United States to purchase
equipment from numerous other countries throughout the world, the appraiser may need to
utilize many different trend tables in one valuation.7
Exchange Rates
Exchange rates are another factor that must be considered when performing ap-
praisals of property outside the United States. Exchange rates may have significant influ-
ence if the values are to be reported in a currency other than that of the country in which
the property is located.8
One method is to trend the data using “local” trends and then to perform only one
currency conversion, as of the valuation date. Another method is to perform the currency
conversions at each specific historic date and then trend the data. This may be especially
helpful and relevant if the MTS appraiser decides that it is meaningful and reliable to
utilize BLS trend data instead of local trend data.
Languages
In many cases, the asset records utilized will be in the language of the country
in which the facility is located, requiring a complete or limited translation. There are a
number of translation Websites.9 These sites may not be useful for translating technical
verbiage and abbreviations, and therefore may not give the reader of the translation a rea-
384
sonable indication of what the asset truly is. In many cases the company being valued may
be willing to provide a translation of some or all of the key information.
Cultural Differences
It is very important to recognize and respect the local work ethics and cultures
existing outside the United States. In some countries, it is customary to only work half a
day on Friday, and the local management may or may not allow the appraiser to continue
working on Friday afternoon.
In some countries, breaks may be mandatory for both hourly and salaried work-
ers. This may cause the appraiser to have unplanned downtime, especially if the facility
requires an escort.
Appraisers must make themselves aware of and take whatever steps are necessary
in order to obtain an understanding of various cultural differences in order to be able to
function effectively in the field.
International Standards
When performing valuations for companies that have headquarters in countries
other than the United States, it is likely that the MTS appraiser will need to follow IFRS
standards and the International Valuation Standards (IVS) set forth by the International
Valuation Standards Council (IVSC).10
When performing valuations for financial reporting, the IASB standards may need
to be followed instead of the Financial Accounting Standards Board (FASB) standards
currently applicable in the United States. As stated in Chapter 9 Valuing for Financial
Reporting, the FASB and IASB are working on developing common, or at least parallel
standards, but these may not be ready in the near future.
Because the actual valuation may be under different valuation standards (e.g., IVS
or other standards) than those applicable in the United States, the appraiser must have some
familiarity with the FASB and IVS standards and how these compare to and differ from the
FASB standards.11
Summary
Due to a variety of reasons, the need for international valuations is increasing, and
this trend is expected to continue at an escalating rate.
In the past decade, the worldwide basis valuation profession has made significant
progress in developing and training appraisers and valuers who can value tangible property
on a consistent basis. ASA basic valuation courses and university and internet offerings
have enabled the valuation profession to be tested and awarded with various professional
designations.
The selection of the appropriate valuation technique usually is dictated by the re-
quirements of the appraisal’s end user. While these requirements can vary, the basic tech-
niques are similar throughout the world.
It is recommended to always incorporate the assistance of a local who is familiar
with the language and laws. If the appraiser has no offices with local people in a given
country, it may raise both the ethical question or competence, and the practical one of
getting the job done right. While valuation theory is the same in any country, practical
385
application differs due to laws, accounting standards, restrictions, and so forth discussed
in this chapter.
Key Points
• For many years, some of the most populated and industrialized countries in the
world did not have a free-market economy, and therefore had no need for the ser-
vices of appraisers. This changed in 1989 when the “wall” surrounding Eastern
Europe opened to the West.
• Appraisers throughout the United States and Canada, Western Europe, Australia,
and most of South and Central America typically use various basic definitions of
valuation, such as reproduction cost new, replacement cost new, fair market value
in use, fair market value in exchange, fair market value installed, orderly and forced
liquidation value, auction value, liquidation in place, salvage, and scrap value. The
international acceptance and use of these definitions is increasing as the need arises
for valuations at various levels of trade.
• In the United States, the valuation profession dates back to the late 1890s. Virtu-
ally all appraisal work prepared in the first half of the 20th century was done for
insurance-related purposes.
• The appraisal profession is highly developed in Western Europe, and both the mac-
roidentification and microidentification techniques are used for the listing of assets,
with all of the traditional approaches to value being employed.
• The microidentification technique, including inventory and verification, generally
is used in Eastern Europe only for major items of machinery and equipment. Minor
assets typically are accounted for on a group basis, and a sampling or grouped-
assets approach commonly is used.
• For most appraisals in Central and South America and Mexico, the microidentifica-
tion technique often is used for all of the major assets; typically only the major as-
sets are valued individually. Minor assets typically are valued in relevant groupings.
• In Asia, Japan, and India, often minor items are not inspected and verified; sampling
is applied using grouped-assets techniques.
• Valuations in many countries outside the United States often are performed using
existing fixed-asset records.
• Under the IASB’s guidance, many countries now are adopting IFRS, which is
meant to achieve a degree of international uniformity.
• In many foreign countries, reliable trend data is not as plentiful as it is in the United
States.
• Exchange rates may have significant influence if the values are to be reported in a
currency other than that of the country in which the property is located.
• In many cases, the asset records utilized will be in the language of the country in
which the facility is located, requiring a complete or limited translation.
386
• It is very important to recognize and respect the local work ethics and cultures
existing outside the United States.
• When performing valuations for companies that have headquarters in countries
other than the United States, it is likely that the MTS appraiser will need to follow
IFRS and IVS standards, set forth by IVSC.
Additional Reading
Kirit Budhbhatti. Valuation of Plant & Machinery (Theory & Practice). Karamsad, Guija-
rat, India: Graphic Printers, 1999.
Notes
1
In some parts of the world, appraisers are commonly referred to as valuers, and machinery and equipment often is referred to as plant
property and equipment.
2
See the glossary section of this book for expansion of these various definitions.
3
Any appraiser or appraisal that is subject to USPAP requirements must exercise caution when using this methodology to assure that the
results are credible and not misleading, regardless of the location of the company or the property.
4
Ibid. This is particularly true if the scope of work for the valuation does not include a visit to the foreign locations.
5
The appropriate steps required are outlined in the Scope of Work sections of USPAP.
6
Sometimes it is possible to use trend factors from a proxy country by establishing a similarity between another, somewhat similar
country and the subject country.
7
The purchase of machinery and equipment from foreign countries also is becoming ever more prevalent in the United States, and
therefore any discussion of trending techniques offered herein also may be appropriate for appraisals performed within the United States.
A brief summary of some sources for trend data for various countries is as follows:
COUNTRY POTENTIAL TREND INDICES SOURCE WEBSITES

Australia Price index of Articles Produced Manufacturing http:\\www.abs.gov.au/
Industry, Australian Bureau of Statistics, http:\\www.aiqs.com.au/
Building Economist, The Australia Institute of
Quantity Surveyors
Austria Oesterreichisches Statistisches Zentralamt http:\\www.statistik.at/
(Austrian Central Statistics Office)
Brazil Conjuntura Economica, Fundacao Getulio http:\\www.ibre.fgv.br/
Vargas, Instituto Brasileiro de Economia
Czech Republic Czech Statistical Office http:\\www.czso.cz/eng/redakce.nsf/i/home
Denmark “Prisstatistik,” Statistics Denmark http:\\www.dst.dk/homeuk.aspx
Finland Bulletin of Statistics, Statistics Finland http:\\www.stat.fi/index_en.html
France Bullentin Mensuel De Statistique, Institute http:\\www.insee.fr/en/
national De La Statistique et des Etudes
Economics
Germany Statistiches Bundesamt http:\\www.destatis.de/jetspeed/portal/cms/
Hong Kong Monthly Digest Statistics, Hong Kong
Hungary KSH Statistics www.ksh.hu
Japan Price Indexes Monthly, Bank of Japan/ http:\\www.boj.or.jp/en
Republic of Ireland CSO, Government of Ireland http:\\www.cso.ie/
Italy Bollettino Mensile di Statistica, Istat Centro http:\\www.istat.it/
Statistica Aziendale
Luxembourg Bulletin du Statec http:\\www.statistiques.public.lu/fr/
Mexico “Indicators Economicos,” Banco de Mexico http:\\www.banxico.org.mx/
387
The Netherlands Maandsatatistik Van de Prijzen, CBS Statistics, http:\\www.cbs.nl/en-GB/menu/home/default.htm

Netherlands Troostwijk Taxaties
http:\\troostwijk.nl/
New Zealand Statistics New Zealand http:\\www.stat.govt.nz/methods_and_services/
order-and-subscribe.aspx
Norway Statistisk Monatshefte Central Bureau of http:\\www.ssb.no/en/
Statistics
Philippines National Statistics Office, Republic of the http:\\www.census.gov.ph/
Philippines
Russian Federation Federal State Statistics Service http:\\www.gks.ru/eng/
Singapore Monthly Bulletin of Statistics, Singapore http:\\www.singstat.gov.sg/
Department of Statistics
South Africa Production Price Index, Statistics South Africa http:\\www.statssa.gov.za/
South Korea Monthly Statistical Bulletin, Bank of Hong
Kong
Spain Boletin Mensual de Estadistica, Instituto http:\\www.ine.es/en/prodyser/pubweb_en.htm
Nacional de Estadistica
Sweden Allman Manadsstatisk, Statistics Sweden http:\\www.scb.se/default___2514.aspx
Switzerland Swiss Federal Statistical Office http:\\www.bfs.admin.ch/bfs/portal/en/index.html
Taiwan-Republic of China Monthly Bulletin of Statistics, Directorate http:\\eng.stat.gov.tw/mp.asp?mp=5
General of Budget, Accounting, and Statistics,
The Republic of China
United Kingdom “MM17 Price Index Numbers for Current Cost http:\\www.statistics.gov.uk/StatBase/Product.
Accounting”, Office for National Statistics asp?vlnk=2206
Various International Monetary Fund (a paid http:\\www.imf.org/external/index.htm
subscription service)
8
Some currency exchange rate Websites include:
Universal Currency Converter http://www.xe.com/ucc/
Currency Converter for 164 Currencies http://www.oanda.com/convert/classic
Yahoo!® Finance http://finance.yahoo.com/currency-converter?u#from=USD;to=EUR;amt=1
Online Currency Trading http://www.gocurrency.com/
Bloomberg L.P. http://www.bloomberg.com/invest/calculators/currency.html
This is by no means a comprehensive listing of conversion Websites, but is meant to give the reader an idea of the different types of
conversion Websites available.
9
Examples of translation Websites are:
Yahoo!® Babel Fish http://babelfish.yahoo.com
SDL http://www.freetranslation.com
Google Translate http://translate.google.com
10
The IVSC initially was called The International Assets Valuation Standards Committee (TIAVSC) when it was formed by representatives
of the valuation profession from the United Kingdom and the United States in 1981. It changed its name to the IVSC in 1994. In 2007,
the IVSC was made up of representatives of 52 countries. The first edition of International Valuation Standards was published in 1985.
The eighth and most current edition (as of the date of the publication of this book) was published in 2007. Additional information
regarding the IVSC or specifics of the standards may be found at International Valuation Standards Council’s Web site, http://www.ivsc.
org/about/index.html.
11
See the footnotes of Chapter 9 Valuing for Financial Reporting for a brief cross-reference between the various applicable FASB
standards and the IASB and IVS standards. It is recommended that the appraiser review the appropriate standards before beginning
their project so they know any specific requirements that must be met. Also, the Royal Institute of Chartered Surveyors (RICS) has
published the Red Book since 1974, with the most recent edition being published in 2008. The Red Book contains mandatory rules,
best-practices guidance, and related commentary for all RICS members undertaking asset valuations. This publication is utilized by,
and is very influential for, those involved in valuation worldwide, regardless if they are RICS members. Appraisers who are not RICS
members are not bound by the rules outlined in the Red Book; however, it is possible that this will be the benchmark by which their
appraisal will be judged and reviewed. As such, it is beneficial to be at least briefly familiar with this publication. The Red Book can be
loosely described as RICS’ version of USPAP. It outlines all of the factors that must be considered in performing a valuation and outlines
388
minimum requirements for terms of engagement, valuation preparation, and reporting. RICS recently published A Valuer’s Guide to the
RICS Red Book 2009, a good summary of the Red Book’s important points. In addition to different standards, the definitions of value
also may be different from country to country, and it is critical that the appraiser recognize that readers of the appraisal report may have
a different thought process and idea in mind regarding values reported. Pages 41–49 of A Valuer’s Guide to the RICS Red Book 2009
briefly discuss some of the different premises of value utilized by RICS members. Page 41 outlines market value, which is defined as:
The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing
seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and
without compulsion.
The guide then further describes and clarifies this definition. In general, the definition of market value as applied here is very similar to
the definition of fair market value as defined in the Glossary section of this book. RICS also indicates a “Worth and Investment Value,”
which incorporates the value of a property to a particular owner or investor for a specific investment or operational objective. This value
takes into account the performance of the particular property against certain identified investment criteria, and is not necessarily the same
as market value. Page 44 outlines fair value, which is defined as:
The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s-length transaction.
Based on the source, this value assumes that the asset is sold in an arm’s-length transaction, but assumes that the asset is not exposed
to the marketplace. This is somewhat different than the interpretation of most United States valuation practitioners. However, for
valuations for financial reporting purposes, the source goes on to note that fair value is equated to market value in most cases. Pages
44–48 describe existing use value, which is defined as:
The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing
seller in an arm’s-length transaction, after proper marketing wherein the parties had acted knowledgeably, prudently and
without compulsion, assuming that the buyer is granted vacant possession of all parts of the property required by the business
and disregarding potential alternative uses and any other characteristics of the property that would cause its Market Value to
differ from that needed to replace the remaining service potential at least cost.
In essence, this is similar to the concept of fair market value in continued use. Pages 48–49 describe depreciated replacement cost. In the
past, depreciated replacement cost had a definition completely different from Market Value, and was considered a separate value premise
all together. Recently, however, depreciated replacement cost has been redefined as a method to arrive at market value. However, the
Red Book does state that the depreciated replacement cost methodology should be utilized only when valuing specialized properties or
properties that rarely sell in the open marketplace. The Red Book goes on to explain that, in applying the depreciated replacement cost
methodology, the appraiser needs to consider the potential profitability (or lack thereof) in arriving at the final value conclusion. Also,
according to the Red Book:
When reporting a valuation which has been estimated by using depreciated replacement cost methodology, the member must
state in the report:
(a) the Market Value for any readily identifiable alternative use, if higher; or
(b) if appropriate, a statement that the Market Value on cessation of the business would be materially lower.
As can be seen in the above discussion, some very different value definitions and ideas must be considered when valuing assets in
countries other than the United States.
389
Appendix A
Accounting Depreciation
What follows is a simple overview of accounting methods and terminology. It is
included primarily to demonstrate that accounting depreciation differs significantly from
appraisal depreciation.
In calculating depreciation, companies typically use one of the following four
methods:
• straight line,
• units of activity,
• double declining balance, and
• sum-of-the-years digits.
Straight-line depreciation calculations are a constant amount for each period. It is
the depreciable cost divided by the asset’s useful life. The formula that gives the amount of
depreciation to be taken each year is
D = C/n,
where D is the annual depreciation amount, C is the depreciable (generally not
including salvage value) cost, and n is the depreciable life in years. Assume for example
that an asset has a 5-year life with an initial cost of $11,000 and a salvage value of $1,000.
The depreciable cost would be $10,000, and the annual depreciation rate would be 20%
(100% over 5 years). The depreciation amounts are shown in Table A.1.
Initial Salvage Depreciable Depreciation Annual* Accumulated Net Book

Year Cost Value Cost Rate Depreciation Depreciation Value
1 $11,000 — $1,000 = $10,000 x 20% = $2,000 $2,000 $9,000
2 $11,000 — $1,000 = $10,000 x 20% = $2,000 $4,000 $7,000
3 $11,000 — $1,000 = $10,000 x 20% = $2,000 $6,000 $5,000
4 $11,000 — $1,000 = $10,000 x 20% = $2,000 $8,000 $3,000
5 $11,000 — $1,000 = $10,000 x 20% = $2,000 $10,000 $1,000 **
*Note: The annual depreciation is subtracted from the initial cost [$11,000 – $2,000
= $9,000]. Note that this is for calculating accounting depreciation only. The salvage value
used in this method is not usually considered in appraisals.
** Net book value that remains represents the $1,000 assumed for salvage value.
Table A.1. Straight-line depreciation.
Units of activity is similar to straight line; however, the depreciation calculation

is based on hours used or some other production unit and may vary from the current ac-
390
counting period to the next period. As an example, suppose a machine has a life of 100,000
hours and its initial cost is $11,000 with a salvage value of $1,000 and a depreciable cost
of $10,000. The depreciation cost per unit is calculated by dividing the depreciable cost
by the total life. In this case the depreciation cost per unit is $10,000/100,000 hours which
equals $0.10 per unit. The depreciation, assuming the given annual hours used, would be
calculated for each year as shown in Table A.2.
Depreciation Annual Accumulated Net Book

Year Hours Cost/Unit Depreciation Depreciation Value
1 20,000 x $0.10 = $2,000 $2,000 $8,000
2 40,000 x $0.10 = $4,000 $6,000 $4,000
3 15,000 x $0.10 = $1,500 $7,500 $2,500
4 15,000 x $0.10 = $1,500 $9,000 $1,000
5 10,000 x $0.10 = $1,000 $10,000 $1,000*
*Note: Net book value that remains represents the $1,000 assumed for salvage value and
there is no further reduction taken for accumulated depreciation at this point.
Table A.2. Units of activity.
The double declining balance depreciation method is an accelerated depreciation

method because it results in a higher depreciation in the early years. In this method, the
depreciation rate remains constant while the book value to which the rate is applied is
declining each year. Under this method, the salvage value is not considered until the cost is
fully depreciated. This method can be applied to the previous straight-line example: an as-
set with a 5-year life, initial cost of $11,000, and a salvage value of $1,000. The depreciable
cost would still be $10,000. The annual depreciation rate would be twice the straight-line
rate of 20% for a total of 40%. The depreciation amounts are calculated as shown in Table
A.3.
Beginning Net Depreciation Annual Accumulated Net Book

Year Book Value Rate Depreciation Depreciation Value
1 $11,000 x 40% = $4,400 $4,400 $6,600
2 $6,600 x 40% = $2,640 $7,040 $3,960
3 $3,960 x 40% = $1,584 $8,624 $2,376
4 $2,376 x 40% = $950 $9,574 $1,426
*5 $1,426 x Approx. 30% = $426 $10,000 $1,000*
*Note: In Year 5 the salvage value of $1,000 limits the amount to $426 and the depreciation
percentage rate to approximately 30%.
Table A.3. Double declining balance.
The sum-of-the-years digits method is also an accelerated depreciation method. In

this method, a declining fraction is applied to the depreciable cost. The fraction’s numera-
tor is equal to the remaining service at the beginning of each year, and its denominator
is equal to the sum of the total years over the estimated useful life. For a 5-year life the
391
denominator is equal to (1 + 2 + 3 + 4 + 5) = 15. The calculations (assuming a salvage value

of $1,000) are demonstrated in Table A.4.
Initial Salvage Depreciable Depreciation Annual* Accumulated Net Book
Year Cost Value Cost Rate Depreciation Depreciation Value
1 $11,000 — $1,000 = $10,000 x 5/15=.3333 = $3,333 $3,333 $7,667
2 $11,000 — $1,000 = $10,000 x 4/15=.2667 = $2,667 $6,000 $5,000
3 $11,000 — $1,000 = $10,000 x 3/15=.2000 = $2,000 $8,000 $3,000
4 $11,000 — $1,000 = $10,000 x 2/15=.1333 = $1,333 $9,333 $1,667
5 $11,000 — $1,000 = $10,000 x 1/15=.0667 = $667 $10,000 $1,000*
*Note: Net book value that remains represents the $1,000 assumed for salvage value.
Table A.4. Sum-of-the-years digits.
392
Appendix B
Compound Interest
Appraisers should understand the theories of compound interest and present value
and the latter’s application in calculating various obsolescence penalties. Compound inter-
est is calculated on an ever-increasing basic sum. For example, if 10% compound interest
were applied to $1.00 for a period of 5 years, the total principal and interest at the end of
the 5-year period would be $1.6105 as shown in Table B.1.
Accumulation of Accumulation of
Year Interest Calculations Interest Principal and Interest
0 Initial Amount $1.00
1 10% x $1.00 = $0.10 $0.10 $1.10
2 10% x $1.10 = $0.11 $0.21 $1.21
3 10% x $1.21 = $0.121 $0.331 $1.331
4 10% x $1.331 = $0.1331 $0.4641 $1.4641
5 10% x $1.4641 = $0.1464 $0.6105 $1.6105
Totals $0.6105 $1.6105
Table B.1 Compound interest.
The above calculations can be checked by referring to appendix C, Table C.1; under
the 10% column and across the 5-year row is the factor of 1.6105, which, when multiplied
by $1.00, equals $1.6105.
Interest Calculations
Modern calculators and computer spreadsheet programs can simplify compound
interest and time value of money calculations. Alternatively, tables providing the numerical
factors used in compound interest calculations are available in most financial or math-
ematical texts. Four such tables are included in Appendix C:
Table C.1. Future Value of $1.00
Table C.2. Present Value of $1.00
Table C.3. Future Value of an Annuity
Table C.4. Present Value of an Annuity
393
Compound Interest
Table C.4 is similar to Table C.3, except that C.3 is for an annuity requiring pay-
ments every year while C.4 is for one initial payment. For example, an annuity based on
10% interest and $1.00 per year would be calculated as shown in Table B.2.
Interest and Payment Annual Accumulation of

Year Calculation Payments Principal and Interest
1 Initial Amount + $1.00 $ 1.00
2 10% x $1.00 = $0.10 + $1.00 $ 2.10
3 10% x $2.10 = $0.21 + $1.00 $ 3.31
4 10% x $3.31 = $0.331 + $1.00 $ 4.641
5 10% x $4.641 = $0.4641 + $1.00 $ 6.1051
Totals $5.00 $ 6.1051
Table B.2. Interest calculations.
Check these calculations against Table C.3; using the 10% interest column and
5-year row, the factor is 6.1051, which when multiplied by $1.00 yields $6.1051.
The concept of present value (it is sometimes called present worth) is basically
the inverse of compound interest. Stated another way, a dollar today is worth more than a
dollar in the future. If one invests 91 cents today at 10% interest, it will grow to 1 dollar in
1 year. Thus, the present value of $1.00 to be received 1 year in the future is 91 cents today
at 10% interest. To receive $1.00 per year during each of the next 2 years, how much would
have to be invested today? At 10% and considering each year separately, the investment
should be 91 cents today for the first year and approximately 82.6 cents today to receive
$1.00 for each of the next 2 years. Therefore, the present value of $1.00 to be received in
each of the next 2 years is 91 cents plus 82.6 cents or $1.736 at 10%. This is the process of
discounting in its simplest form. It is the conversion of expected future periodic payments
to present value.1
Present value factors can be manually calculated as shown below. Again, assume a
10% interest rate, $1.00 as principal, and a 5-year term. One dollar discounted in the first
year would be represented by $0.9091, derived by dividing $1.00 by $1.10. The results of
the five-year discounting are reflected as follows:
Year 1 = $ 1.0000 ÷ 1.10 = $0.9091
Year 2 = $ 0.9091 ÷ 1.10 = $0.8264
Year 3 = $ 0.8264 ÷ 1.10 = $0.7513
Year 4 = $ 0.7513 ÷ 1.10 = $0.6830
Year 5 = $ 0.6830 ÷ 1.10 = $0.6209
394
Compound Interest
The calculation is graphically displayed in Table B.3.
$1 $1 $1 $1 $1
Year
(Periods)
0 1 2 3 4 5
1 $0.9091
2 $0.8264
3 $0.7513
4 $0.6830
5 $0.6209
Total $3.7907
Table B.3. Present value graph.
The above calculation can be verified by examining Table C.4 at the 10% column
and 5-year row amount.
The present value concept can be used to assist with estimating various forms of
functional and economic obsolescence. For example, as discussed in Chapter 3, present
value calculations are used to quantify functional obsolescence caused by excess operating
costs because the excess costs usually occur over a term of years.
Note
Robert S. Svoboda. 1989. “Fair Market Value Concepts.” In Appraising Machinery and Equipment, p. 99.
1
395
Appendix C
Financial Tables
The use and application of the following financial tables was covered in appendix
B. The following tables are included here:
Table C.1. Future Value of $1.00.
Table C.2. Present Value of $1.00.
Table C.3. Future Value of an Annuity.
Table C.4. Present Value of an Annuity.
n
FUTURE VALUE OF $1
FVn = PVx (1 + i ) FVn = future value at the end of “n” periods
i = interest rate n = number of periods
PV = present value
n Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 $1.010000 $1.020000 $1.030000 $1.040000 $1.050000 $1.060000 $1.070000 $1.080000 $1.090000 $1.100000
2 $1.020100 $1.040400 $1.060900 $1.081600 $1.102500 $1.123600 $1.144900 $1.166400 $1.188100 $1.210000
3 $1.030301 $1.061208 $1.092727 $1.124864 $1.157625 $1.191016 $1.225043 $1.259712 $1.295029 $1.331000
4 $1.040604 $1.082432 $1.125509 $1.169859 $1.215506 $1.262477 $1.310796 $1.360489 $1.411582 $1.464100
5 $1.051010 $1.104081 $1.159274 $1.216653 $1.276282 $1.338226 $1.402552 $1.469328 $1.538624 $1.610510
6 $1.061520 $1.126162 $1.194052 $1.265319 $1.340096 $1.418519 $1.500730 $1.586874 $1.677100 $1.771561
7 $1.072135 $1.148686 $1.229874 $1.315932 $1.407100 $1.503630 $1.605781 $1.713824 $1.828039 $1.948717
8 $1.082857 $1.171659 $1.266770 $1.368569 $1.477455 $1.593848 $1.718186 $1.850930 $1.992563 $2.143589
9 $1.093685 $1.195093 $1.304773 $1.423312 $1.551328 $1.689479 $1.838459 $1.999005 $2.171893 $2.357948
10 $1.104622 $1.218994 $1.343916 $1.480244 $1.628895 $1.790848 $1.967151 $2.158925 $2.367364 $2.593742
11 $1.115668 $1.243374 $1.384234 $1.539454 $1.710339 $1.898299 $2.104852 $2.331639 $2.580426 $2.853117
12 $1.126825 $1.268242 $1.425761 $1.601032 $1.795856 $2.012196 $2.252192 $2.518170 $2.812665 $3.138428
13 $1.138093 $1.293607 $1.468534 $1.665074 $1.885649 $2.132928 $2.409845 $2.719624 $3.065805 $3.452271
14 $1.149474 $1.319479 $1.512590 $1.731676 $1.979932 $2.260904 $2.578534 $2.937194 $3.341727 $3.797498
15 $1.160969 $1.345868 $1.557967 $1.800944 $2.078928 $2.396558 $2.759032 $3.172169 $3.642482 $4.177248
16 $1.172579 $1.372786 $1.604706 $1.872981 $2.182875 $2.540352 $2.952164 $3.425943 $3.970306 $4.594973
17 $1.184304 $1.400241 $1.652848 $1.947900 $2.292018 $2.692773 $3.158815 $3.700018 $4.327633 $5.054470
18 $1.196147 $1.428246 $1.702433 $2.025817 $2.406619 $2.854339 $3.379932 $3.996019 $4.717120 $5.559917
19 $1.208109 $1.456811 $1.753506 $2.106849 $2.526950 $3.025600 $3.616528 $4.315701 $5.141661 $6.115909
20 $1.220190 $1.485947 $1.806111 $2.191123 $2.653298 $3.207135 $3.869684 $4.660957 $5.604411 $6.727500
21 $1.232392 $1.515666 $1.860295 $2.278768 $2.785963 $3.399564 $4.140562 $5.033834 $6.108808 $7.400250
22 $1.244716 $1.545980 $1.916103 $2.369919 $2.925261 $3.603537 $4.430402 $5.436540 $6.658600 $8.140275
23 $1.257163 $1.576899 $1.973587 $2.464716 $3.071524 $3.819750 $4.740530 $5.871464 $7.257874 $8.954302
24 $1.269735 $1.608437 $2.032794 $2.563304 $3.225100 $4.048935 $5.072367 $6.341181 $7.911083 $9.849733
25 $1.282432 $1.640606 $2.093778 $2.665836 $3.386355 $4.291871 $5.427433 $6.848475 $8.623081 $10.834706
26 $1.295256 $1.673418 $2.156591 $2.772470 $3.555673 $4.549383 $5.807353 $7.396353 $9.399158 $11.918177
27 $1.308209 $1.706886 $2.221289 $2.883369 $3.733456 $4.822346 $6.213868 $7.988061 $10.245082 $13.109994
28 $1.321291 $1.741024 $2.287928 $2.998703 $3.920129 $5.111687 $6.648838 $8.627106 $11.167140 $14.420994
29 $1.334504 $1.775845 $2.356566 $3.118651 $4.116136 $5.418388 $7.114257 $9.317275 $12.172182 $15.863093
30 $1.347849 $1.811362 $2.427262 $3.243398 $4.321942 $5.743491 $7.612255 $10.062657 $13.267678 $17.449402
These financial tables are provided for reference only. Users are cautioned to verify their accuracy.
Table C.1. Future value of $1.00.
Financial Tables
n Periods 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 $1.110000 $1.120000 $1.130000 $1.140000 $1.150000 $1.160000 $1.170000 $1.180000 $1.190000 $1.200000
2 $1.232100 $1.254400 $1.276900 $1.299600 $1.322500 $1.345600 $1.368900 $1.392400 $1.416100 $1.440000
Financial Tables
3 $1.367631 $1.404928 $1.442897 $1.481544 $1.520875 $1.560896 $1.601613 $1.643032 $1.685159 $1.728000
4 $1.518070 $1.573519 $1.630474 $1.688960 $1.749006 $1.810639 $1.873887 $1.938778 $2.005339 $2.073600
5 $1.685058 $1.762342 $1.842435 $1.925415 $2.011357 $2.100342 $2.192448 $2.287758 $2.386354 $2.488320
6 $1.870415 $1.973823 $2.081952 $2.194973 $2.313061 $2.436396 $2.565164 $2.699554 $2.839761 $2.985984
7 $2.076160 $2.210681 $2.352605 $2.502269 $2.660020 $2.826220 $3.001242 $3.185474 $3.379315 $3.583181
8 $2.304538 $2.475963 $2.658444 $2.852586 $3.059023 $3.278415 $3.511453 $3.758859 $4.021385 $4.299817
9 $2.558037 $2.773079 $3.004042 $3.251949 $3.517876 $3.802961 $4.108400 $4.435454 $4.785449 $5.159780
10 $2.839421 $3.105848 $3.394567 $3.707221 $4.045558 $4.411435 $4.806828 $5.233836 $5.694684 $6.191736
11 $3.151757 $3.478550 $3.835861 $4.226232 $4.652391 $5.117265 $5.623989 $6.175926 $6.776674 $7.430084
12 $3.498451 $3.895976 $4.334523 $4.817905 $5.350250 $5.936027 $6.580067 $7.287593 $8.064242 $8.916100
13 $3.883280 $4.363493 $4.898011 $5.492411 $6.152788 $6.885791 $7.698679 $8.599359 $9.596448 $10.699321
14 $4.310441 $4.887112 $5.534753 $6.261349 $7.075706 $7.987518 $9.007454 $10.147244 $11.419773 $12.839185
15 $4.784589 $5.473566 $6.254270 $7.137938 $8.137062 $9.265521 $10.538721 $11.973748 $13.589530 $15.407022
16 $5.310894 $6.130394 $7.067326 $8.137249 $9.357621 $10.748004 $12.330304 $14.129023 $16.171540 $18.488426
17 $5.895093 $6.866041 $7.986078 $9.276464 $10.761264 $12.467685 $14.426456 $16.672247 $19.244133 $22.186111
18 $6.543553 $7.689966 $9.024268 $10.575169 $12.375454 $14.462514 $16.878953 $19.673251 $22.900518 $26.623333
19 $7.263344 $8.612762 $10.197423 $12.055693 $14.231772 $16.776517 $19.748375 $23.214436 $27.251616 $31.948000
20 $8.062312 $9.646293 $11.523088 $13.743490 $16.366537 $19.460759 $23.105599 $27.393035 $32.429423 $38.337600
21 $8.949166 $10.803848 $13.021089 $15.667578 $18.821518 $22.574481 $27.033551 $32.323781 $38.591014 $46.005120
22 $9.933574 $12.100310 $14.713831 $17.861039 $21.644746 $26.186398 $31.629255 $38.142061 $45.923307 $55.206144
23 $11.026267 $13.552347 $16.626629 $20.361585 $24.891458 $30.376222 $37.006228 $45.007632 $54.648735 $66.247373
24 $12.239157 $15.178629 $18.788091 $23.212207 $28.625176 $35.236417 $43.297287 $53.109006 $65.031994 $79.496847
25 $13.585464 $17.000064 $21.230542 $26.461916 $32.918953 $40.874244 $50.657826 $62.668627 $77.388073 $95.396217
26 $15.079865 $19.040072 $23.990513 $30.166584 $37.856796 $47.414123 $59.269656 $73.948980 $92.091807 $114.475460
27 $16.738650 $21.324881 $27.109279 $34.389906 $43.535315 $55.000382 $69.345497 $87.259797 $109.589251 $137.370552
28 $18.579901 $23.883866 $30.633486 $39.204493 $50.065612 $63.800444 $81.134232 $102.966560 $130.411208 $164.844662
29 $20.623691 $26.749930 $34.615839 $44.693122 $57.575454 $74.008515 $94.927051 $121.500541 $155.189338 $197.813595
30 $22.892297 $29.959922 $39.115898 $50.950159 $66.211772 $85.849877 $111.064650 $143.370638 $184.675312 $237.376314
Table C.1. Future value of $1.00.
PRESENT VALUE OF $1
1 PV = present value
PV = FVn x n i = interest rate n = number of periods
(1 + i ) FVn = future value at the end of “n” periods
n Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 $0.990099 $0.980392 $0.970874 $0.961538 $0.952381 $0.943396 $0.934579 $0.925926 $0.917431 $0.909091
2 $0.980296 $0.961169 $0.942596 $0.924556 $0.907029 $0.889996 $0.873439 $0.857339 $0.841680 $0.826446
3 $0.970590 $0.942322 $0.915142 $0.888996 $0.863838 $0.839619 $0.816298 $0.793832 $0.772183 $0.751315
4 $0.960980 $0.923845 $0.888487 $0.854804 $0.822702 $0.792094 $0.762895 $0.735030 $0.708425 $0.683013
5 $0.951466 $0.905731 $0.862609 $0.821927 $0.783526 $0.747258 $0.712986 $0.680583 $0.649931 $0.620921
6 $0.942045 $0.887971 $0.837484 $0.790315 $0.746215 $0.704961 $0.666342 $0.630170 $0.596267 $0.564474
7 $0.932718 $0.870560 $0.813092 $0.759918 $0.710681 $0.665057 $0.622750 $0.583490 $0.547034 $0.513158
8 $0.923483 $0.853490 $0.789409 $0.730690 $0.676839 $0.627412 $0.582009 $0.540269 $0.501866 $0.466507
9 $0.914340 $0.836755 $0.766417 $0.702587 $0.644609 $0.591898 $0.543934 $0.500249 $0.460428 $0.424098
10 $0.905287 $0.820348 $0.744094 $0.675564 $0.613913 $0.558395 $0.508349 $0.463193 $0.422411 $0.385543
11 $0.896324 $0.804263 $0.722421 $0.649581 $0.584679 $0.526788 $0.475093 $0.428883 $0.387533 $0.350494
12 $0.887449 $0.788493 $0.701380 $0.624597 $0.556837 $0.496969 $0.444012 $0.397114 $0.355535 $0.318631
13 $0.878663 $0.773033 $0.680951 $0.600574 $0.530321 $0.468839 $0.414964 $0.367698 $0.326179 $0.289664
14 $0.869963 $0.757875 $0.661118 $0.577475 $0.505068 $0.442301 $0.387817 $0.340461 $0.299246 $0.263331
15 $0.861349 $0.743015 $0.641862 $0.555265 $0.481017 $0.417265 $0.362446 $0.315242 $0.274538 $0.239392
16 $0.852821 $0.728446 $0.623167 $0.533908 $0.458112 $0.393646 $0.338735 $0.291890 $0.251870 $0.217629
17 $0.844377 $0.714163 $0.605016 $0.513373 $0.436297 $0.371364 $0.316574 $0.270269 $0.231073 $0.197845
18 $0.836017 $0.700159 $0.587395 $0.493628 $0.415521 $0.350344 $0.295864 $0.250249 $0.211994 $0.179859
19 $0.827740 $0.686431 $0.570286 $0.474642 $0.395734 $0.330513 $0.276508 $0.231712 $0.194490 $0.163508
20 $0.819544 $0.672971 $0.553676 $0.456387 $0.376889 $0.311805 $0.258419 $0.214548 $0.178431 $0.148644
21 $0.811430 $0.659776 $0.537549 $0.438834 $0.358942 $0.294155 $0.241513 $0.198656 $0.163698 $0.135131
22 $0.803396 $0.646839 $0.521893 $0.421955 $0.341850 $0.277505 $0.225713 $0.183941 $0.150182 $0.122846
23 $0.795442 $0.634156 $0.506692 $0.405726 $0.325571 $0.261797 $0.210947 $0.170315 $0.137781 $0.111678
24 $0.787566 $0.621721 $0.491934 $0.390121 $0.310068 $0.246979 $0.197147 $0.157699 $0.126405 $0.101526
25 $0.779768 $0.609531 $0.477606 $0.375117 $0.295303 $0.232999 $0.184249 $0.146018 $0.115968 $0.092296
26 $0.772048 $0.597579 $0.463695 $0.360689 $0.281241 $0.219810 $0.172195 $0.135202 $0.106393 $0.083905
27 $0.764404 $0.585862 $0.450189 $0.346817 $0.267848 $0.207368 $0.160930 $0.125187 $0.097608 $0.076278
28 $0.756836 $0.574375 $0.437077 $0.333477 $0.255094 $0.195630 $0.150402 $0.115914 $0.089548 $0.069343
29 $0.749342 $0.563112 $0.424346 $0.320651 $0.242946 $0.184557 $0.140563 $0.107328 $0.082155 $0.063039
30 $0.741923 $0.552071 $0.411987 $0.308319 $0.231377 $0.174110 $0.131367 $0.099377 $0.075371 $0.057309
Table C.2. Present value of $1.00.
Financial Tables
n Periods 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 $0.900901 $0.892857 $0.884956 $0.877193 $0.869565 $0.862069 $0.854701 $0.847458 $0.840336 $0.833333
2 $0.811622 $0.797194 $0.783147 $0.769468 $0.756144 $0.743163 $0.730514 $0.718184 $0.706165 $0.694444
Financial Tables
3 $0.731191 $0.711780 $0.693050 $0.674972 $0.657516 $0.640658 $0.624371 $0.608631 $0.593416 $0.578704
4 $0.658731 $0.635518 $0.613319 $0.592080 $0.571753 $0.552291 $0.533650 $0.515789 $0.498669 $0.482253
5 $0.593451 $0.567427 $0.542760 $0.519369 $0.497177 $0.476113 $0.456111 $0.437109 $0.419049 $0.401878
6 $0.534641 $0.506631 $0.480319 $0.455587 $0.432328 $0.410442 $0.389839 $0.370432 $0.352142 $0.334898
7 $0.481658 $0.452349 $0.425061 $0.399637 $0.375937 $0.353830 $0.333195 $0.313925 $0.295918 $0.279082
8 $0.433926 $0.403883 $0.376160 $0.350559 $0.326902 $0.305025 $0.284782 $0.266038 $0.248671 $0.232568
9 $0.390925 $0.360610 $0.332885 $0.307508 $0.284262 $0.262953 $0.243404 $0.225456 $0.208967 $0.193807
10 $0.352184 $0.321973 $0.294588 $0.269744 $0.247185 $0.226684 $0.208037 $0.191064 $0.175602 $0.161506
11 $0.317283 $0.287476 $0.260698 $0.236617 $0.214943 $0.195417 $0.177810 $0.161919 $0.147565 $0.134588
12 $0.285841 $0.256675 $0.230706 $0.207559 $0.186907 $0.168463 $0.151974 $0.137220 $0.124004 $0.112157
13 $0.257514 $0.229174 $0.204165 $0.182069 $0.162528 $0.145227 $0.129892 $0.116288 $0.104205 $0.093464
14 $0.231995 $0.204620 $0.180677 $0.159710 $0.141329 $0.125195 $0.111019 $0.098549 $0.087567 $0.077887
15 $0.209004 $0.182696 $0.159891 $0.140096 $0.122894 $0.107927 $0.094888 $0.083516 $0.073586 $0.064905
16 $0.188292 $0.163122 $0.141496 $0.122892 $0.106865 $0.093041 $0.081101 $0.070776 $0.061837 $0.054088
17 $0.169633 $0.145644 $0.125218 $0.107800 $0.092926 $0.080207 $0.069317 $0.059980 $0.051964 $0.045073
18 $0.152822 $0.130040 $0.110812 $0.094561 $0.080805 $0.069144 $0.059245 $0.050830 $0.043667 $0.037561
19 $0.137678 $0.116107 $0.098064 $0.082948 $0.070265 $0.059607 $0.050637 $0.043077 $0.036695 $0.031301
20 $0.124034 $0.103667 $0.086782 $0.072762 $0.061100 $0.051385 $0.043280 $0.036506 $0.030836 $0.026084
21 $0.111742 $0.092560 $0.076798 $0.063826 $0.053131 $0.044298 $0.036991 $0.030937 $0.025913 $0.021737
22 $0.100669 $0.082643 $0.067963 $0.055988 $0.046201 $0.038188 $0.031616 $0.026218 $0.021775 $0.018114
23 $0.090693 $0.073788 $0.060144 $0.049112 $0.040174 $0.032920 $0.027022 $0.022218 $0.018299 $0.015095
24 $0.081705 $0.065882 $0.053225 $0.043081 $0.034934 $0.028380 $0.023096 $0.018829 $0.015377 $0.012579
25 $0.073608 $0.058823 $0.047102 $0.037790 $0.030378 $0.024465 $0.019740 $0.015957 $0.012922 $0.010483
26 $0.066314 $0.052521 $0.041683 $0.033149 $0.026415 $0.021091 $0.016872 $0.013523 $0.010859 $0.008735
27 $0.059742 $0.046894 $0.036888 $0.029078 $0.022970 $0.018182 $0.014421 $0.011460 $0.009125 $0.007280
28 $0.053822 $0.041869 $0.032644 $0.025507 $0.019974 $0.015674 $0.012325 $0.009712 $0.007668 $0.006066
29 $0.048488 $0.037383 $0.028889 $0.022375 $0.017369 $0.013512 $0.010534 $0.008230 $0.006444 $0.005055
30 $0.043683 $0.033378 $0.025565 $0.019627 $0.015103 $0.011648 $0.009004 $0.006975 $0.005415 $0.004213
Table C.2. Present value of $1.00.
FUTURE VALUE OF AN ANNUITY
 (1 + i )n − 1  FVAn = future value of an annuity for “n” periods
FVAn = PMT x   i = interest rate n = number of periods
 i  PMT = periodic payment
 
n Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000
2 $2.010000 $2.020000 $2.030000 $2.040000 $2.050000 $2.060000 $2.070000 $2.080000 $2.090000 $2.100000
3 $3.030100 $3.060400 $3.090900 $3.121600 $3.152500 $3.183600 $3.214900 $3.246400 $3.278100 $3.310000
4 $4.060401 $4.121608 $4.183627 $4.246464 $4.310125 $4.374616 $4.439943 $4.506112 $4.573129 $4.641000
5 $5.101005 $5.204040 $5.309136 $5.416323 $5.525631 $5.637093 $5.750739 $5.866601 $5.984711 $6.105100
6 $6.152015 $6.308121 $6.468410 $6.632975 $6.801913 $6.975319 $7.153291 $7.335929 $7.523335 $7.715610
7 $7.213535 $7.434283 $7.662462 $7.898294 $8.142008 $8.393838 $8.654021 $8.922803 $9.200435 $9.487171
8 $8.285671 $8.582969 $8.892336 $9.214226 $9.549109 $9.897468 $10.259803 $10.636628 $11.028474 $11.435888
9 $9.368527 $9.754628 $10.159106 $10.582795 $11.026564 $11.491316 $11.977989 $12.487558 $13.021036 $13.579477
10 $10.462213 $10.949721 $11.463879 $12.006107 $12.577893 $13.180795 $13.816448 $14.486562 $15.192930 $15.937425
11 $11.566835 $12.168715 $12.807796 $13.486351 $14.206787 $14.971643 $15.783599 $16.645487 $17.560293 $18.531167
12 $12.682503 $13.412090 $14.192030 $15.025805 $15.917127 $16.869941 $17.888451 $18.977126 $20.140720 $21.384284
13 $13.809328 $14.680332 $15.617790 $16.626838 $17.712983 $18.882138 $20.140643 $21.495297 $22.953385 $24.522712
14 $14.947421 $15.973938 $17.086324 $18.291911 $19.598632 $21.015066 $22.550488 $24.214920 $26.019189 $27.974983
15 $16.096896 $17.293417 $18.598914 $20.023588 $21.578564 $23.275970 $25.129022 $27.152114 $29.360916 $31.772482
16 $17.257864 $18.639285 $20.156881 $21.824531 $23.657492 $25.672528 $27.888054 $30.324283 $33.003399 $35.949730
17 $18.430443 $20.012071 $21.761588 $23.697512 $25.840366 $28.212880 $30.840217 $33.750226 $36.973705 $40.544703
18 $19.614748 $21.412312 $23.414435 $25.645413 $28.132385 $30.905653 $33.999033 $37.450244 $41.301338 $45.599173
19 $20.810895 $22.840559 $25.116868 $27.671229 $30.539004 $33.759992 $37.378965 $41.446263 $46.018458 $51.159090
20 $22.019004 $24.297370 $26.870374 $29.778079 $33.065954 $36.785591 $40.995492 $45.761964 $51.160120 $57.274999
21 $23.239194 $25.783317 $28.676486 $31.969202 $35.719252 $39.992727 $44.865177 $50.422921 $56.764530 $64.002499
22 $24.471586 $27.298984 $30.536780 $34.247970 $38.505214 $43.392290 $49.005739 $55.456755 $62.873338 $71.402749
23 $25.716302 $28.844963 $32.452884 $36.617889 $41.430475 $46.995828 $53.436141 $60.893296 $69.531939 $79.543024
24 $26.973465 $30.421862 $34.426470 $39.082604 $44.501999 $50.815577 $58.176671 $66.764759 $76.789813 $88.497327
25 $28.243200 $32.030300 $36.459264 $41.645908 $47.727099 $54.864512 $63.249038 $73.105940 $84.700896 $98.347059
26 $29.525631 $33.670906 $38.553042 $44.311745 $51.113454 $59.156383 $68.676470 $79.954415 $93.323977 $109.181765
27 $30.820888 $35.344324 $40.709634 $47.084214 $54.669126 $63.705766 $74.483823 $87.350768 $102.723135 $121.099942
28 $32.129097 $37.051210 $42.930923 $49.967583 $58.402583 $68.528112 $80.697691 $95.338830 $112.968217 $134.209936
29 $33.450388 $38.792235 $45.218850 $52.966286 $62.322712 $73.639798 $87.346529 $103.965936 $124.135356 $148.630930
30 $34.784892 $40.568079 $47.575416 $56.084938 $66.438848 $79.058186 $94.460786 $113.283211 $136.307539 $164.494023
Table C.3. Future value of an annuity.
Financial Tables
n Periods 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000
2 $2.110000 $2.120000 $2.130000 $2.140000 $2.150000 $2.160000 $2.170000 $2.180000 $2.190000 $2.200000
Financial Tables
3 $3.342100 $3.374400 $3.406900 $3.439600 $3.472500 $3.505600 $3.538900 $3.572400 $3.606100 $3.640000
4 $4.709731 $4.779328 $4.849797 $4.921144 $4.993375 $5.066496 $5.140513 $5.215432 $5.291259 $5.368000
5 $6.227801 $6.352847 $6.480271 $6.610104 $6.742381 $6.877135 $7.014400 $7.154210 $7.296598 $7.441600
6 $7.912860 $8.115189 $8.322706 $8.535519 $8.753738 $8.977477 $9.206848 $9.441968 $9.682952 $9.929920
7 $9.783274 $10.089012 $10.404658 $10.730491 $11.066799 $11.413873 $11.772012 $12.141522 $12.522713 $12.915904
8 $11.859434 $12.299693 $12.757263 $13.232760 $13.726819 $14.240093 $14.773255 $15.326996 $15.902028 $16.499085
9 $14.163972 $14.775656 $15.415707 $16.085347 $16.785842 $17.518508 $18.284708 $19.085855 $19.923413 $20.798902
10 $16.722009 $17.548735 $18.419749 $19.337295 $20.303718 $21.321469 $22.393108 $23.521309 $24.708862 $25.958682
11 $19.561430 $20.654583 $21.814317 $23.044516 $24.349276 $25.732904 $27.199937 $28.755144 $30.403546 $32.150419
12 $22.713187 $24.133133 $25.650178 $27.270749 $29.001667 $30.850169 $32.823926 $34.931070 $37.180220 $39.580502
13 $26.211638 $28.029109 $29.984701 $32.088654 $34.351917 $36.786196 $39.403993 $42.218663 $45.244461 $48.496603
14 $30.094918 $32.392602 $34.882712 $37.581065 $40.504705 $43.671987 $47.102672 $50.818022 $54.840909 $59.195923
15 $34.405359 $37.279715 $40.417464 $43.842414 $47.580411 $51.659505 $56.110126 $60.965266 $66.260682 $72.035108
16 $39.189948 $42.753280 $46.671735 $50.980352 $55.717472 $60.925026 $66.648848 $72.939014 $79.850211 $87.442129
17 $44.500843 $48.883674 $53.739060 $59.117601 $65.075093 $71.673030 $78.979152 $87.068036 $96.021751 $105.930555
18 $50.395936 $55.749715 $61.725138 $68.394066 $75.836357 $84.140715 $93.405608 $103.740283 $115.265884 $128.116666
19 $56.939488 $63.439681 $70.749406 $78.969235 $88.211811 $98.603230 $110.284561 $123.413534 $138.166402 $154.740000
20 $64.202832 $72.052442 $80.946829 $91.024928 $102.443583 $115.379747 $130.032936 $146.627970 $165.418018 $186.688000
21 $72.265144 $81.698736 $92.469917 $104.768418 $118.810120 $134.840506 $153.138535 $174.021005 $197.847442 $225.025600
22 $81.214309 $92.502584 $105.491006 $120.435996 $137.631638 $157.414987 $180.172086 $206.344785 $236.438456 $271.030719
23 $91.147884 $104.602894 $120.204837 $138.297035 $159.276384 $183.601385 $211.801341 $244.486847 $282.361762 $326.236863
24 $102.174151 $118.155241 $136.831465 $158.658620 $184.167841 $213.977607 $248.807569 $289.494479 $337.010497 $392.484236
25 $114.413307 $133.333870 $155.619556 $181.870827 $212.793017 $249.214024 $292.104856 $342.603486 $402.042491 $471.981083
26 $127.998771 $150.333934 $176.850098 $208.332743 $245.711970 $290.088267 $342.762681 $405.272113 $479.430565 $567.377300
27 $143.078636 $169.374007 $200.840611 $238.499327 $283.568766 $337.502390 $402.032337 $479.221093 $571.522372 $681.852760
28 $159.817286 $190.698887 $227.949890 $272.889233 $327.104080 $392.502773 $471.377835 $566.480890 $681.111623 $819.223312
29 $178.397187 $214.582754 $258.583376 $312.093725 $377.169693 $456.303216 $552.512066 $669.447450 $811.522831 $984.067974
30 $199.020878 $241.332684 $293.199215 $356.786847 $434.745146 $530.311731 $647.439118 $790.947991 $966.712169 $1,181.881569
Table C.3. Future value of an annuity.
PRESENT VALUE OF AN ANNUITY
1 1  PVAn = present value of an annuity for “n” periods
PVAn = PMT x  −  i = interest rate n = number of periods
 i i (1 + i )n  PMT = periodic payment
 
n Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 $0.990099 $0.980392 $0.970874 $0.961538 $0.952381 $0.943396 $0.934579 $0.925926 $0.917431 $0.909091
2 $1.970395 $1.941561 $1.913470 $1.886095 $1.859410 $1.833393 $1.808018 $1.783265 $1.759111 $1.735537
3 $2.940985 $2.883883 $2.828611 $2.775091 $2.723248 $2.673012 $2.624316 $2.577097 $2.531295 $2.486852
4 $3.901966 $3.807729 $3.717098 $3.629895 $3.545951 $3.465106 $3.387211 $3.312127 $3.239720 $3.169865
5 $4.853431 $4.713460 $4.579707 $4.451822 $4.329477 $4.212364 $4.100197 $3.992710 $3.889651 $3.790787
6 $5.795476 $5.601431 $5.417191 $5.242137 $5.075692 $4.917324 $4.766540 $4.622880 $4.485919 $4.355261
7 $6.728195 $6.471991 $6.230283 $6.002055 $5.786373 $5.582381 $5.389289 $5.206370 $5.032953 $4.868419
8 $7.651678 $7.325481 $7.019692 $6.732745 $6.463213 $6.209794 $5.971299 $5.746639 $5.534819 $5.334926
9 $8.566018 $8.162237 $7.786109 $7.435332 $7.107822 $6.801692 $6.515232 $6.246888 $5.995247 $5.759024
10 $9.471305 $8.982585 $8.530203 $8.110896 $7.721735 $7.360087 $7.023582 $6.710081 $6.417658 $6.144567
11 $10.367628 $9.786848 $9.252624 $8.760477 $8.306414 $7.886875 $7.498674 $7.138964 $6.805191 $6.495061
12 $11.255077 $10.575341 $9.954004 $9.385074 $8.863252 $8.383844 $7.942686 $7.536078 $7.160725 $6.813692
13 $12.133740 $11.348374 $10.634955 $9.985648 $9.393573 $8.852683 $8.357651 $7.903776 $7.486904 $7.103356
14 $13.003703 $12.106249 $11.296073 $10.563123 $9.898641 $9.294984 $8.745468 $8.244237 $7.786150 $7.366687
15 $13.865053 $12.849264 $11.937935 $11.118387 $10.379658 $9.712249 $9.107914 $8.559479 $8.060688 $7.606080
16 $14.717874 $13.577709 $12.561102 $11.652296 $10.837770 $10.105895 $9.446649 $8.851369 $8.312558 $7.823709
17 $15.562251 $14.291872 $13.166118 $12.165669 $11.274066 $10.477260 $9.763223 $9.121638 $8.543631 $8.021553
18 $16.398269 $14.992031 $13.753513 $12.659297 $11.689587 $10.827603 $10.059087 $9.371887 $8.755625 $8.201412
19 $17.226008 $15.678462 $14.323799 $13.133939 $12.085321 $11.158116 $10.335595 $9.603599 $8.950115 $8.364920
20 $18.045553 $16.351433 $14.877475 $13.590326 $12.462210 $11.469921 $10.594014 $9.818147 $9.128546 $8.513564
21 $18.856983 $17.011209 $15.415024 $14.029160 $12.821153 $11.764077 $10.835527 $10.016803 $9.292244 $8.648694
22 $19.660379 $17.658048 $15.936917 $14.451115 $13.163003 $12.041582 $11.061240 $10.200744 $9.442425 $8.771540
23 $20.455821 $18.292204 $16.443608 $14.856842 $13.488574 $12.303379 $11.272187 $10.371059 $9.580207 $8.883218
24 $21.243387 $18.913926 $16.935542 $15.246963 $13.798642 $12.550358 $11.469334 $10.528758 $9.706612 $8.984744
25 $22.023156 $19.523456 $17.413148 $15.622080 $14.093945 $12.783356 $11.653583 $10.674776 $9.822580 $9.077040
26 $22.795204 $20.121036 $17.876842 $15.982769 $14.375185 $13.003166 $11.825779 $10.809978 $9.928972 $9.160945
27 $23.559608 $20.706898 $18.327031 $16.329586 $14.643034 $13.210534 $11.986709 $10.935165 $10.026580 $9.237223
28 $24.316443 $21.281272 $18.764108 $16.663063 $14.898127 $13.406164 $12.137111 $11.051078 $10.116128 $9.306567
29 $25.065785 $21.844385 $19.188455 $16.983715 $15.141074 $13.590721 $12.277674 $11.158406 $10.198283 $9.369606
30 $25.807708 $22.396456 $19.600441 $17.292033 $15.372451 $13.764831 $12.409041 $11.257783 $10.273654 $9.426914
Table C.4. Present value of an annuity.
Financial Tables
n Periods 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 $0.900901 $0.892857 $0.884956 $0.877193 $0.869565 $0.862069 $0.854701 $0.847458 $0.840336 $0.833333
2 $1.712523 $1.690051 $1.668102 $1.646661 $1.625709 $1.605232 $1.585214 $1.565642 $1.546501 $1.527778
Financial Tables
3 $2.443715 $2.401831 $2.361153 $2.321632 $2.283225 $2.245890 $2.209585 $2.174273 $2.139917 $2.106481
4 $3.102446 $3.037349 $2.974471 $2.913712 $2.854978 $2.798181 $2.743235 $2.690062 $2.638586 $2.588735
5 $3.695897 $3.604776 $3.517231 $3.433081 $3.352155 $3.274294 $3.199346 $3.127171 $3.057635 $2.990612
6 $4.230538 $4.111407 $3.997550 $3.888668 $3.784483 $3.684736 $3.589185 $3.497603 $3.409777 $3.325510
7 $4.712196 $4.563757 $4.422610 $4.288305 $4.160420 $4.038565 $3.922380 $3.811528 $3.705695 $3.604592
8 $5.146123 $4.967640 $4.798770 $4.638864 $4.487322 $4.343591 $4.207163 $4.077566 $3.954366 $3.837160
9 $5.537048 $5.328250 $5.131655 $4.946372 $4.771584 $4.606544 $4.450566 $4.303022 $4.163332 $4.030967
10 $5.889232 $5.650223 $5.426243 $5.216116 $5.018769 $4.833227 $4.658604 $4.494086 $4.338935 $4.192472
11 $6.206515 $5.937699 $5.686941 $5.452733 $5.233712 $5.028644 $4.836413 $4.656005 $4.486500 $4.327060
12 $6.492356 $6.194374 $5.917647 $5.660292 $5.420619 $5.197107 $4.988387 $4.793225 $4.610504 $4.439217
13 $6.749870 $6.423548 $6.121812 $5.842362 $5.583147 $5.342334 $5.118280 $4.909513 $4.714709 $4.532681
14 $6.981865 $6.628168 $6.302488 $6.002072 $5.724476 $5.467529 $5.229299 $5.008062 $4.802277 $4.610567
15 $7.190870 $6.810864 $6.462379 $6.142168 $5.847370 $5.575456 $5.324187 $5.091578 $4.875863 $4.675473
16 $7.379162 $6.973986 $6.603875 $6.265060 $5.954235 $5.668497 $5.405288 $5.162354 $4.937700 $4.729561
17 $7.548794 $7.119630 $6.729093 $6.372859 $6.047161 $5.748704 $5.474605 $5.222334 $4.989664 $4.774634
18 $7.701617 $7.249670 $6.839905 $6.467420 $6.127966 $5.817848 $5.533851 $5.273164 $5.033331 $4.812195
19 $7.839294 $7.365777 $6.937969 $6.550369 $6.198231 $5.877455 $5.584488 $5.316241 $5.070026 $4.843496
20 $7.963328 $7.469444 $7.024752 $6.623131 $6.259331 $5.928841 $5.627767 $5.352746 $5.100862 $4.869580
21 $8.075070 $7.562003 $7.101550 $6.686957 $6.312462 $5.973139 $5.664758 $5.383683 $5.126775 $4.891316
22 $8.175739 $7.644646 $7.169513 $6.742944 $6.358663 $6.011326 $5.696375 $5.409901 $5.148550 $4.909430
23 $8.266432 $7.718434 $7.229658 $6.792056 $6.398837 $6.044247 $5.723397 $5.432120 $5.166849 $4.924525
24 $8.348137 $7.784316 $7.282883 $6.835137 $6.433771 $6.072627 $5.746493 $5.450949 $5.182226 $4.937104
25 $8.421745 $7.843139 $7.329985 $6.872927 $6.464149 $6.097092 $5.766234 $5.466906 $5.195148 $4.947587
26 $8.488058 $7.895660 $7.371668 $6.906077 $6.490564 $6.118183 $5.783106 $5.480429 $5.206007 $4.956323
27 $8.547800 $7.942554 $7.408556 $6.935155 $6.513534 $6.136364 $5.797526 $5.491889 $5.215132 $4.963602
28 $8.601622 $7.984423 $7.441200 $6.960662 $6.533508 $6.152038 $5.809851 $5.501601 $5.222800 $4.969668
29 $8.650110 $8.021806 $7.470088 $6.983037 $6.550877 $6.165550 $5.820386 $5.509831 $5.229243 $4.974724
30 $8.693793 $8.055184 $7.495653 $7.002664 $6.565980 $6.177198 $5.829390 $5.516806 $5.234658 $4.978936
Table C.4. Present value of an annuity.
Appendix D
Quick Reference Tables and
Conversion Factors
QUICK REFERENCE TABLES
Apothecaries’ Weight
20 grains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 scruple
3 scruples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 dram
8 drams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ounce
12 ounces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 pound
Ounce and pound are the same as in Troy Weight.
Avoirdupois Weight
27 11/32 grains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 dram
16 drams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ounce
16 ounces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 pound
25 pounds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 quarter
4 quarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 cwt.
2,000 pounds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 short ton
2,240 pounds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 long Ton
Troy Weight
24 grains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 pennyweight
20 pennyweights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ounce
12 ounces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 pound
Used for weighing gold, silver and jewels.
Cloth Measure
2 ¼ inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 nail
4 nails . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 quarter
4 quarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 yard
Cubic Measure
1,728 cubic inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 cubic foot
27 cubic feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 cubic yard
128 cubic feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 cord (wood)
40 cubic feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ton (shipping)
2,150.42 cubic inches . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 standard bushel
231 cubic inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 U.S. standard gallon
1 cubic foot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . about 4/5 of a bushel
Dry Measure
2 pints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 quart
8 quarts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 peck
4 pecks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 bushel
36 bushels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 chaldron
Liquid Measure
4 gills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 pint
2 pints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 quart
4 quarts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 gallon
31 ½ gallons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 barrel
2 barrels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 hogshead
405
Quick Reference Tables and Conversion Factors
Long Measure
12 inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 foot
3 feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 yard
5 ½ yards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 rod
40 rods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 furlong
8 furlongs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 statute mile
3 miles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 league
Mariners’ Measure
6 feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 fathom
120 fathoms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 cable length
7 ½ cable lengths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 mile
5,280 feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 statute mile
6,076.1154856 feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 nautical mile
Paper Measure
24 sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 quire
20 quires . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ream (480 sheets)
2 reams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 bundle
5 bundles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 bale
Square Miles
144 square inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 square foot
9 square feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 square yard
30 ¼ square yards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 square rod
40 square rods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 rood
4 roods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 acre
640 acres . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 square mile
Surveyors’ Measure
7.92 inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 link
25 links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 rod
4 rods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 chain
10 square chains or 160 square rods . . . . . . . . . . . . . . . 1 acre
640 acres . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 square mile
36 square miles (6 miles square) . . . . . . . . . . . . . . . . . . 1 township
Miscellaneous
3 inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 palm
4 inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 hand
6 inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 span
18 inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 cubit
21.8 inches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Bible cubit
2 ½ feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 military pace
Metric Equivalents
1 centimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3937 inch
1 inch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.54 centimeters
1 decimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9370079 inches
1 decimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.328084 foot
1 foot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.048 decimeters
1 meter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.37 inches
1 meter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0936 yards
1 yard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9144 meters
1 decameter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9884 rods
1 rod . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5029 decameters
1 kilometer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.62137 miles
1 mile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6093 kilometers
Square Measure
1 square centimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1550 square inches
1 square inch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.452 square centimeters
1 square decimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1076 square feet
1 square foot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2903 square decimeters
1 square meter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.196 square yards
1 square yard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8361 square meters
406
1 acre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.954 rods

1 square rod . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2529 acres
1 hectare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.47 acres
1 acre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4047 hectares
1 square kilometer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.386 square miles
1 square mile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.59 square kilometers
Measure of Volume
1 cubic centimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.061 cubic inch
1 cubic inch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.39 cubic centimeters
1 cubic decimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.353 cubic feet
1 cubic foot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.317 cubic decimeters
1 cubic meter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.308 cubic yards
1 cubic yard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7646 cubic meters
1 stere . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2759 cord
1 cord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.624 steres
1 liter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.908 quarts dry
1 liter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0567 quarts liquid
1 quart dry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.101 liters
1 quart liquid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9463 liters
1 dekaliter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6417 gallons
1 dekaliter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 pecks
1 gallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3785 dekaliters
1 peck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.881 dekaliters
1 hectoliter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8375 bushels
1 bushel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3524 hectoliters
Weights
1 gram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.03527 ounces
1 ounce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.35 grams
1 kilogram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2046 pounds
1 pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4536 kilograms
1 metric ton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1023 English tons
1 English ton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9072 metric tons
Approximate Metric Equivalents

1 decimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 inches
1 liter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.06 quarts liquid
1 liter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 quarts dry
1 meter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 yards
1 kilometer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5/8 of a mile
1 hectoliter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5/8 bushels
1 hectare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ½ acres
1 kilogram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1/5 pounds
1 stere, or cubic meter. . . . . . . . . . . . . . . . . . . . . . . . . . . ¼ of a cord
1 metric ton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200 pounds
Temperatures
Milk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freezes at 30° F above Zero
Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freezes 32° F above Zero
Olive Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freezes 36° F above Zero
Wine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freezes 20° F above Zero
Vinegar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freezes 28° F above Zero
Alcohol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Boils at 173° F above Zero
Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Boils at 212° F above Zero
Petroleum (average) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Boils at 306° F above Zero
Eggs Hatch at . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104° F above Zero
407
CONVERSION FACTORS
To Convert Into Multiply By
A
Acres Arpents 1.181
Acres Hectares 0.4046856
Acres Homestead 0.00625
Acres Square Feet 43,560.0
Acres Square Yards 4,840
Acres Square Meters 4,047
Acres Square Miles 1.562 × 10–3
Aluminum Iron 0.3451293
Aluminum Copper 0.2967662
Aluminum Gold 0.136943
Aluminum Lead 0.2324538
Amperes Per Square Centimeters Amperes Per Square Inches 6.452
Amperes Per Square Centimeters Amperes Per Square Meter 104
Amperes Per Square Inches Amperes Per Square Centimeter 0.1550
Amperes Per Square Inches Amperes Per Square Meters 1,550.0
Amperes Per Square Meter Amperes Per Square Centimeter 10–4
Amperes Per Square Meter Amperes Per Square Inches 6.452 × 10–4
Ampere-Turns Per Centimeter Ampere-Turns Per Inch 2.540
Ampere-Turns Per Centimeter Ampere-Turns Per Meter 100.0
Ampere-Turns Per Inch Ampere-Turns Per Centimeter 0.3937
Ampere-Turns Per Inch Ampere-Turns Per Meter 39.37
Ampere-Turns Per Meter Ampere-Turns Per Centimeter 0.01
Ampere-Turns Per Meter Ampere-Turns Per Inch 0.0254
Arpent Square Feet 36.864
Arpent French Feet 180.0
Arpent Toise 30.0
Arpents Acres 0.846
Astronomical Unit Kilometers 1.495 × 108
Atmospheres Ton Per Square Inch .007348
Atmospheres Centimeters of Mercury 76.0
Atmospheres Feet of Water (at 4° C) 33.90
Atmospheres Inches of Mercury (at 0° C) 29.92
Atmospheres Kilogram Per Square Centimeter 1.0333
Atmospheres Kilogram Per Square Meter 10,332
Atmospheres Pounds Per Square Inch 14.70
Atmospheres Tons Per Square Foot 1.058
408

Atmospheres Inches of Mercury 29.92
Atmospheres Tons Per Square Foot 1.058
Atmospheres Feet of Water 33.90
B
Barrels (United States Dry) Cubic Inches 7,056
Barrels (United States Dry) Quarts (Dry) 105.0
Barrels (United States Liquid) Gallons 31.5
Barrels (Oil) Gallons (Oil) 42.0
Bars Pounds Per Square Foot 2,089
Bars Pounds Per Square Inch 14.50
Bits Bytes 0.125
Bits Kilobytes 0.0001221
Boiler Horsepower British Thermal Units Per Hour 33,475
Pounds of Water Evaporated From and at
Boiler Horsepower 212° F 34.5
Bolt (United States Cloth) Meters 36.576
British Thermal Units Liter- Atmosphere 10.409
British Thermal Units Per Hour Horsepower-Hours 0.000393
British Thermal Units Per Hour Kilogram-Force Meter Per Hour 107.5858
British Thermal Units Per Hour Kilowatt-Hours 0.000293
British Thermal Units Per Hour Foot Pounds-Force Per Second 0.2162
British Thermal Units Per Hour Watts 0.2931
British Thermal Units Per Hour Foot-Pounds-Force Per Hour 778.1693
British Thermal Units Per Hour Foot-Pounds-Force Per Minute 12.9695
British Thermal Units Per Minute Foot Pounds-Force Per Minute 12.96
British Thermal Units Per Minute Horsepower 0.02356
British Thermal Units Per Minute Kilowatts 0.01757
British Thermal Units Per Minute Watts 17.57
British Thermal Units Per Square Foot
Per Minute Watts Per Square Inch 0.1221
Bushels Cubic Feet 1.2445
Bushels Cubic Inches 2,150.42
Bushels Cubic Meters 0.03524
Bushels Liters 35.24
Bushels Pecks 4.0
Bushels Pints (Dry) 64.0
Bushels Quarts (Dry) 32.0
Bytes Bits 8.00
409
C
Calories, Gram (Mean) British Thermal Units (Mean) 3.9685 × 10–3
Centigrade Fahrenheit (Cox9/5) +32
Centigrams Grams 0.01
Centiliter Ounce Fluid (United States) .3382
Centiliter Cubic Inch .6103
Centiliter Drams 2.705
Centiliters Liters 0.01
–2
Centimeters Feet 3.281 × 10
Centimeters Inches 0.3937
–5
Centimeters Kilometers 10
Centimeters Meters 0.01
–6
Centimeters Miles 6.214 × 10
Centimeters Millimeters 10.0
–2
Centimeters Yards 1.094 × 10
–5
Centimeters-Grams Meter-Kilograms 10
–5
Centimeters-Grams Pound-Feet 7.233 × 10
Centimeters of Mercury Atmospheres 0.01316
Centimeters of Mercury Feet of Water 0.4461
Centimeters of Mercury Kilograms Per Square Meter 136.0
Centimeters of Mercury Pounds Per Square Foot 27.85
Centimeters of Mercury Pounds Per Square Inch 0.1934
Centimeters Per Second Feet Per Minute 1.969
Centimeters Per Second Feet Per Second 0.03281
Centimeters Per Second Kilometers Per Hour 0.036
Centimeters Per Second Knots 0.1943
Centimeters Per Second Meters Per Minute 0.6
Centimeters Per Second Miles Per Hour 0.02237
–4
Centimeters Per Second Miles Per Minute 3.728 × 10
Centimeters Per Second Per Second Feet Per Second Per Second 0.03281
Centimeters Per Second Per Second Kilometers Per Hour Per Second 0.036
Centimeters Per Second Per Second Meters Per Second Per Second 0.01
Centimeters Per Second Per Second Miles Per Hour Per Second 0.02237
Chain Inches 792.00
Chain Meters 20.12
Chain (Surveyors’ or Gunter’s) Yards 22.00
Circumference Radians 6.283
Copper Aluminum 3.3696557
Copper Gold 0.4614508
410

Copper Iron 1.1629668
Copper Lead 0.7832894
Cords Cord Feet 8
Cord Feet Cubic Feet 16
–5
Cubic Centimeters Cubic Feet 3.531 × 10
Cubic Centimeters Cubic Inches 0.06102
–6
Cubic Centimeters Cubic Meters 10
Cubic Centimeters Cubic Yards 1.308 × 10–6
Cubic Centimeters Gallons (United States Liquid) 2.642 × 10–4
-3
Cubic Centimeters Liters 10
Cubic Centimeters Pints (United States Liquid) 2.113 × 10–3
Cubic Centimeters Quarts (United States Liquid) 1.057 × 10–3
Cubic Feet Bushels (Dry) 0.8036
Cubic Feet Cubic Centimeters 2.832 × 104
Cubic Feet Cubic Inches 1,728.0
Cubic Feet Cubic Meters 0.02832
Cubic Feet Cubic Yards 0.03704
Cubic Feet Gallons (United States Liquid) 7.48052
Cubic Feet Liters 28.32
Cubic Feet Pints (United States Liquid) 59.84
Cubic Feet Quarts (United States Liquid) 29.92
Cubic Feet of Water Pounds (at 60° F) 62.37
Cubic Feet Per Minute Cubic Centimeters Per Second 472.0
Cubic Feet Per Minute Gallons Per Second 0.1247
Cubic Feet Per Minute Liters Per Second 0.4720
Cubic Feet Per Minute Pounds of Water Per Minute @ 60° F 62.43
Cubic Feet Per Second Million Gallons Per Day 0.646317
Cubic Feet Per Second Gallons Per Minute 448.831
Cubic Inches Cubic Centimeters 16.39
Cubic Inches Cubic Feet 5.787 × 10–4
Cubic Inches Cubic Meters 1.639 × 10–5
Cubic Inches Cubic Yards 2.143 × 10–5
Cubic Inches Gallons 4.329 × 10–3
Cubic Inches Liters 0.01639
Cubic Inches Pints (United States Liquid) 0.03463
Cubic Inches Quarts (United States Liquid) 0.01732
Cubic Meters Bushels (Dry) 28.38
Cubic Meters Cubic Centimeters 106
Cubic Meters Cubic Feet 35.31
411

Cubic Meters Cubic Inches 61,023.0
Cubic Meters Cubic Yards 1.308
Cubic Meters Gallons (United States Liquid) 264.2
Cubic Meters Liters 1,000.0
Cubic Meters Pints (United States Liquid) 2,113.0
Cubic Meters Quarts (United States Liquid) 1,057
Cubic Yards Cubic Centimeters 7.646 × 105
Cubic Yards Cubic Feet 27.0
Cubic Yards Cubic Inches 46,656.0
Cubic Yards Cubic Meters 0.7646
Cubic Yards Gallons (United States Liquid) 201.974
Cubic Yards Liters 764.6
Cubic Yards Pints (United States Liquid) 1,615.9
Cubic Yards Quarts (United States Liquid) 807.9
Cubic Yards Per Minute Cubic Feet Per Second 0.45
Cubic Yards Per Minute Gallons Per Second 3.367
Cubic Yards Per Minute Liters Per Second 12.74
D
Day Seconds 86,400.0
Degrees (Angle) Quadrants 0.01111
Degrees (Angle) Radians 0.01745
Degrees (Angle) Seconds 3,600.0
Degrees (Angle) Minutes 60
Degrees Per Second Radians Per Second 0.01745
Drams (Apothecary or Troy) Ounces (Avoirdupois) 0.1371429
Drams (Apothecary or Troy) Ounces (Troy) 0.125
Drams (United States, Fluid or
Apothecary) Cubic Centimeter 3.6967
Drams Grams 1.771845
Drams Grains 27.3437
Drams Ounces 0.0625
F
Fathom Meter 1.828804
Fathoms Feet 6.0
Feet Centimeters 30.48
Feet Kilometers 3.048 × 10–4
Feet Meters 0.3048
412

Feet Miles (Nautical) 1.645 × 10–4
Feet Miles (Statute) 1.894 × 10–4
Feet Millimeters 304.8
Feet Inches 12
Feet Yards 1/3
Feet of Water Atmospheres 0.02950
Feet of Water Inches of Mercury 0.8826
Feet of Water Kilograms Per Square Centimeter 0.03048
Feet of Water Kilograms Per Square Meter 304.8
Feet of Water Pounds Per Square Foot 62.43
Feet of Water Pounds Per Square Inch 0.4335
Feet Per Minute Centimeters Per Second 0.5080
Feet Per Minute Feet Per Second 0.01667
Feet Per Minute Kilometers Per Hour 0.01829
Feet Per Minute Meters Per Minute 0.3048
Feet Per Minute Miles Per Hour 0.01136
Feet Per Second Centimeters Per Second 30.48
Feet Per Second Kilometers Per Hour 1.097
Feet Per Second Knots 0.5921
Feet Per Second Meters Per Minute 18.29
Feet Per Second Miles Per Hour 0.6818
Feet Per Second Miles Per Minute 0.01136
Feet Per Second Per Second Centimeters Per Second Per Second 30.48
Feet Per Second Per Second Kilometers Per Hour Per Second 1.097
Feet Per Second Per Second Meters Per Second Per Second 0.3048
Feet Per Second Per Second Miles Per Hour Per Second 0.6818
Feet Per 100 Feet Percent Grade 1.0
Foot - Candle Lumen Per Square Meter 10.764
Foot-Poundal Foot-Pounds 0.03108
Foot-Pounds British Thermal Units 0.001286
Foot-Pounds Foot-Poundal 32.1740
Foot-Pounds Horsepower-Hours 5.050 × 10–7
Foot-Pounds Kilowatt-Hours 3.766 × 10–7
Foot-Pounds Horsepower-Hours 5.050 × 10–7
Foot Pound-Force Per Minute British Thermal Units Per Minute 1.286 × 10–3
Foot Pounds-Force Per Minute Foot Pounds-Force Per Second 0.016667
Foot Pounds-Force Per Minute Horsepower 3.030 × 10–5
Foot Pounds-Force Per Minute Kilowatts 2.260 × 10–5
Foot Pounds-Force Per Second British Thermal Units Per Hour 4.6263
413

Foot Pounds-Force Per Second British Thermal Units Per Minute 0.07717
Foot Pounds-Force Per Second Horsepower 1.818 × 10–3
Foot Pounds-Force Per Second Kilowatts 1.356 × 10–3
Furlong Miles (United States) 0.125
Furlong Rods 40.0
Furlong Feet 660.0
Furlong Yards 1760.0
G
Gallons Cubic Centimeters 3,785.0
Gallons Cubic Feet 0.1337
Gallons Cubic Inches 231.0
Gallons Cubic Meters 3.785 × 10–3
Gallons Cubic Yards 4.951 × 10–3
Gallons Liters 3.785
Gallons Pints (Liquid) 8
Gallons Quarts (Liquid) 4
Gallons (Liquid British Imperial) Gallons (United States Liquid) 1.20095
Gallons (United States) Gallons (British Imperial) 0.83267
Gallons of Water Pounds of Water at 60° F 8.3453
–3
Gallons Per Minute Cubic Feet Per Second 2.228 × 10
Gallons Per Minute Liters Per Second 0.06308
Gallons Per Minute Cubic Feet Per Hour 8.0208
Gallons Per Minute Tons Water 24 Hours 6.0086
Gigabytes Megabytes 1.024
Gills (British) Cubic Centimeter 142.07
Gills (British) Liters 0.1183
Gills (British) Pints (Liquid) 0.25
Gold Aluminum 7.302308
Gold Copper 2.1670784
Gold Iron 2.5202403
Gold Lead 1.6974494
Grade Radian .01571
Grains Drams (Avoirdupois) 0.03657143
Grains (Troy) Grains (Avoirdupois) 1.0
Grains (Troy) Grams 0.06480
–3
Grains (Troy) Ounces (Avoirdupois) 2.0833 × 10
Grains (Troy) Pennyweights (Troy) 0.04167
Grains Per United States Gallon Parts Per Million 17.118
Grains Per United States Gallon Pounds Per Million Gallon 142.86
414

Grains Per Imperial Gallon Parts Per Million 14.286
Grams Grains 15.43
Grams Kilograms 0.001
Grams Milligrams 1,000
Grams Ounces (Avoirdupois) 0.03527
Grams Ounces (Troy) 0.03215
–3
Grams Pounds 2.205 × 10
–3
Grams Per Centimeter Pounds Per Inch 5.600 × 10
Grams Per Cubic Centimeter Pounds Per Cubic Foot 62.43
Grams Per Cubic Centimeter Pounds Per Cubic Inch 0.03613
Grams Per Liter Grains Per Gallon 58.417
Grams Per Liter Pounds Per 1,000 Gallons 8.345
Grams Per Liter Pounds Per Cubic Foot 0.062427
Grams Per Liter Parts Per Million 1,000.0
Grams Per Square Centimeter Pounds Per Square Foot 2.0481
H
Hand Centimeter 10.16
Hectares Acres 2.5
Hectares Square Feet 1.076 × 105
Hectograms Grams 100.0
Hectoliters Liters 100.0
Hectometers Meters 100.0
Hectowatts Watts 100.0
Henries Millihenries 1,000.0
Hogsheads (British) Cubic Feet 10.114
Hogsheads (United States) Cubic Feet 8.42184
Hogsheads (United States) Gallons (United States) 63
Homestead Acres 160.0007345
Horsepower British Thermal Units Per Hour 2,544,433.5
Horsepower British Thermal Units Per Minute 42.4072
Horsepower Foot Pound-Force Per Hour 1,980,000
Horsepower Foot Pound-Force Per Minute 33,000
Horsepower Foot Pound-Force Per Second 550.0
Horsepower (Metric) (at 542.5 Feet
Pound Per Second) Horsepower (at 550 Feet Pound Per Second) 0.9863
Horsepower (Metric) (542.5 Feet Per Second) 1.014
Horsepower Kilograms-Calories Per Minute 10.70
Horsepower Kilowatts 0.7457
Horsepower Watts 745.7
415

Horsepower (Boiler) British Thermal Units Per Hour 33,475
Horsepower (Boiler) Kilowatts 9.8106
Horsepower-Hours British Thermal Units 2,547
Horsepower-Hours Foot-Pounds 1.98 × 106
Horsepower-Hours Kilowatt-Hours 0.7457
Hundredweights (Long) Pounds 112
Hundredweights (Long) Tons (Long) 0.05
Hundredweights (Short) Ounces (Avoirdupois) 1600
Hundredweights (Short) Pounds 100
Hundredweights (Short) Tons (Metric) 0.0453592
Hundredweights (Short) Tons (Long) 0.0446429
I
Inches Centimeters 2.540
Inches Meters 2.540 × 10–2
Inches Miles 1.578 × 10–5
Inches Millimeters 25.40
–2
Inches Yards 2.778 × 10
International Ampere Ampere (Absolute) .9998
International Volt Volts (Absolute) 1.0003
–19
International Volt Joules (Absolute) 1.593 × 10
4
International Volt Joules 9.654 × 10
K
Kilobytes Bits 8.192
Kilograms Grams 1,000.0
Kilograms Pounds 2.20
Kilograms Tons (Long) 9.842 × 10–4
Kilograms Tons (Short) 1.102 × 10–3
Kilograms Per Cubic Meter Grams Per Cubic Centimeter 0.001
Kilograms Per Cubic Meter Pounds Per Cubic Foot 0.06243
Kilograms Per Meter Pounds Per Foot 0.6720
Kilograms Per Square Centimeter Atmosphere Square Foot 2,048
Kilograms Per Square Centimeter Pounds Per Square Inch 14.22
Kilograms Per Square Meter Atmospheres 9.678 × 10–5
Kilograms Per Square Meter Feet of Water 3.281 × 10–3
Kilograms Per Square Meter Inches of Mercury 2.896 × 10–3
Kilograms Per Square Meter Pounds Per Square Foot 0.2048
Kilograms Per Square Meter Pounds Per Square Inch 1.422 × 10–3
Kilograms Per Square Millimeter Kilograms Per Square Meter 106
416

Kilogram Meters British Thermal Units 9.294 × 10–3
Kilogram Meters Ergs 9.804 × 107
Kilogram Meters Foot-Pounds 7.233
Kilogram Meters Kilowatt-Hours 2.723 × 10–6
Kiloliters Liters 1,000.0
Kilometers Centimeters 105
Kilometers Feet 3,281
Kilometers Inches 3.937 × 104
Kilometers Meters 1,000.0
Kilometers Miles 0.6214
Kilometers Millimeters 106
Kilometers Yards 1,094
Kilometers Per Hour Centimeters Per Second 27.78
Kilometers Per Hour Feet Per Minute 54.68
Kilometers Per Hour Feet Per Second 0.9113
Kilometers Per Hour Knots 0.5396
Kilometers Per Hour Meters Per Minute 16.67
Kilometers Per Hour Miles Per Hour 0.6214
Kilometers Per Hour Per Second Centimeters Per Second Per Second 27.78
Kilometers Per Hour Per Second Feet Per Second Per Second 0.9113
Kilometers Per Hour Per Second Meters Per Second Per Second 0.2778
Kilometers Per Hour Per Second Miles Per Hour Per Second 0.6214
Kilowatts British Thermal Units Per Minute 56.92
Kilowatts Foot Pound-Force Per Minute 4.425 × 104
Kilowatts Foot Pound-Force Per Second 737.5621
Kilowatts Horsepower 1.341
Kilowatts Watts 1,000.0
Kilowatt-Hours British Thermal Units 3,415
Kilowatt-Hours Foot-Pounds 2.655 × 106
Kilowatt-Hours Horsepower-Hours 1.341
Knots Feet Per Hour 6,080
Knots Kilometers Per Hour 1.8532
Knots Nautical Miles Per Hour 1.0
Knots Statute Miles Per Hour 1.151
Knots Yards Per Hour 2,027
Knots Feet Per Second 1.689
L
Lead Aluminum 4.3019296
417

Lead Copper 1.2766674
Lead Gold 0.5891192
Lead Iron 1.4847219
League Miles (Approximately) 3.0
Light Year Miles 5.9 × 1012
Light Year Kilometers 5.560
Links (Engineer’s) Inches 12.0
Links (Surveyor’s) Inches 7.92
Liters Bushels (United States Dry) 0.02838
Liters Cubic Centimeters 1,000.0
Liters Cubic Feet 0.03531
Liters Cubic Inches 61.02
Liters Cubic Meters 0.001
Liters Cubic Yards 1.308 × 10–3
Liters Gallons (United States Liquid) 0.2642
Liters Pints (United States Liquid) 2.113
Liters Quarts (United States Liquid) 1.0567
Liters Per Minute Cubic Foot Per Second 5.886 × 10–4
Liters Per Minute Gallons Per Second 4.403 × 10–3
Lumber Width (Inches) × Thickness
(Inches)/12 Board Feet Length (Feet)
Lumens Per Square Foot Foot-Candles 1.0
Lumen Spherical Candle Power 0.7958
Lumen Watt .001496
Lumen Per Square Foot Lumen Per Square Meter 10.76
Lux Foot-Candles 0.0929
M
Megabytes Bits 8,388.608
Meters Centimeters 100.0
Meters Feet 3.281
Meters Inches 39.37
Meters Kilometers 0.001
Meters Miles (Nautical) 5.396 × 10–4
Meters Miles (Statute) 6.214 × 10–4
Meters Millimeters 1,000.0
Meters Yards 1.1
Meters Per Minute Centimeters Per Second 1.667
Meters Per Minute Feet Per Minute 3.281
Meters Per Minute Feet Per Second 0.05468
418

Meters Per Minute Kilometers Per Hour 0.06
Meters Per Minute Knots 0.03238
Meters Per Minute Miles Per Hour 0.03728
Meters Per Second Feet Per Minute 196.8
Meters Per Second Feet Per Second 3.281
Meters Per Second Kilometers Per Hour 3.6
Meters Per Second Kilometers Per Minute 0.06
Meters Per Second Miles Per Hour 2.237
Meters Per Second Miles Per Minute 0.03728
Meters Per Second Per Second Centimeters Per Second Per Second 100.0
Meters Per Second Per Second Feet Per Second Per Second 3.281
Meters Per Second Per Second Kilometers Per Hour Per Second 3.6
Meters Per Second Per Second Miles Per Hour Per Second 2.237
Meter-Kilograms Pound-Feet 7.233
Microns Meters 10–6
Miles (Nautical) Feet 6,085
Miles (Nautical) Kilometers 1.853
Miles (Nautical) Meters 1,853
Miles (Nautical) Miles (Statute) 1.1516
Miles (Nautical) Yards 2,027
Miles (Statute) Centimeters 1.609 × 105
Miles (Statute) Feet 5,280
Miles (Statute) Inches 6.336 × 104
Miles (Statute) Kilometers 1.609
Miles (Statute) Meters 1,609
Miles (Statute) Miles (Nautical) 0.8684
Miles (Statute) Yards 1,760
Miles Per Hour Centimeters Per Second 44.70
Miles Per Hour Feet Per Minute 88
Miles Per Hour Feet Per Second 1.467
Miles Per Hour Kilometers Per Hour 1.609
Miles Per Hour Kilometers Per Minute 0.02682
Miles Per Hour Knots 0.8684
Miles Per Hour Meters Per Minute 26.82
Miles Per Hour Miles Per Minute 0.1667
Miles Per Hour Per Second Centimeters Per Second Per Second 44.70
Miles Per Hour Per Second Feet Per Second Per Second 1.467
Miles Per Hour Per Second Kilometers Per Hour Per Second 1.609
Miles Per Hour Per Second Meters Per Second Per Second 0.4470
419

Miles Per Minute Centimeters Per Second 2,682
Miles Per Minute Feet Per Second 88
Miles Per Minute Kilometers Per Minute 1.609
Miles Per Minute Knots Per Minute 0.8684
Miles Per Minute Miles Per Hour 60.0
Millimeters Centimeters 0.1
Millimeters Feet 3.281 × 10–3
Millimeters Inches 0.03937
Millimeters Kilometers 10–6
Millimeters Meters 0.001
Millimeters Miles 6.214 × 10–7
Millimeters Mils 39.37
Millimeters Yards 1.094 × 10–3
Million Gallons Per Day Cubic Feet Per Second 1.54723
Minutes (Angles) Degrees 0.01667
Minutes (Angles) Quadrants 1.852 × 10–4
Minutes (Angles) Radians 2.909 × 10–4
Minutes (Angles) Seconds 60.0
O
Ohm (International) Ohm (Absolute) 1.0005
Ohms Megohms 10–6
Ohms Microhms 106
Ounces Drams 16.0
Ounces Grains 437.5
Ounces Grams 28.35
Ounces Pounds 0.0625
Ounces Ounces (Troy) 0.9115
Ounces Tons (Long) 2.790 × 10–5
Ounces Tons (Metric) 2.835 × 10–5
Ounces (Fluid) Cubic Inches 1.805
Ounces (Fluid) Liters 0.02957
Ounces (Troy) Grains 480.0
Ounces (Troy) Grams 31.103481
Ounces (Troy) Ounces (Avoirdupois) 1.09714
Ounces (Troy) Pennyweights (Troy) 20.0
Ounces (Troy) Pounds (Troy) 0.08333
Ounces Per Square Inch Pounds Per Square Inch 0.0625
420
P
Parts Per Million Grains Per United States Gallon 0.0584
Parts Per Million Grains Per Imperial Gallon 0.07016
Parts Per Million Pounds Per Million Gallon 8.345
Pecks (British) Cubic Inches 554.6
Pecks (British) Liters 9.091901
Pecks (United States) Bushels 0.25
Pecks (United States) Cubic Inches 537.605
Pecks (United States) Liters 8.809582
Pecks (United States) Quarts (Dry) 8
Pennyweights (Troy) Grains 24.0
Pennyweights (Troy) Ounces (Troy) 0.05
Pennyweights (Troy) Grams 1.55517
Pennyweights (Troy) Pounds (Troy) 4.1667 × 10–3
Pints (Dry) Cubic Inches 33.60
Pints (Liquid) Cubic Centimeters 473.20
Pints (Liquid) Cubic Feet 0.01671
Pints (Liquid) Cubic Inches 28.87
Pints (Liquid) Cubic Meters 4.732 × 10–4
Pints (Liquid) Cubic Yards 6.189 × 10–4
Pints (Liquid) Gallons 0.125
Pints (Liquid) Liters 0.4732
Pints (Liquid) Quarts (Liquid) 0.5
Pounds (Avoirdupois) Ounces (Troy) 14.5833
Pounds (Avoirdupois) Drams 256
Pounds (Avoirdupois) Grains 7,000
Pounds (Avoirdupois) Grams 453.5924
Pounds (Avoirdupois) Kilograms 0.453924
Pounds (Avoirdupois) Ounces (Avoirdupois) 16.0
Pounds (Avoirdupois) Ounces (Troy) 14.5833
Pounds (Avoirdupois) Pounds (Troy) 1.21528
Pounds (Avoirdupois) Tons (Short) 0.0005
Pounds (Troy) Grains 5,760
Pounds (Troy) Grams 373.24177
Pounds (Troy) Ounces (Avoirdupois) 13.1657
Pounds (Troy) Ounces (Troy) 12.0
Pounds (Troy) Pennyweights (Troy) 240.0
Pounds (Troy) Pounds (Avoirdupois) 0.822857
Pounds (Troy) Tons (Long) 3.6735 × 10–4
421

Pounds (Troy) Tons (Metric) 3.7324 × 10–4
Pounds (Troy) Tons (Short) 4.1143 × 10–4
Pounds of Water Evaporated From
and at 212° F Kilowatt-Hours 0.284
and at 212° F Horsepower-Hours 0.381
and at 212° F British Thermal Units 970.4
Pounds of Water at 60° F Cubic Feet 0.01602
Pounds of Water at 60° F Cubic Inches 27.68
Pounds of Water at 60° F Gallons 0.1198
Pounds of Water Per Minute Cubic Feet Per Second 2.670 × 10–4
Pounds Per Cubic Foot Grams Per Cubic Centimeter 0.01602
Pounds Per Cubic Foot Kilograms Per Cubic Meter 16.02
Pounds Per Cubic Foot Pounds Per Cubic Inch 5.787 × 10–4
Pounds Per Cubic Inch Grams Per Cubic Centimeter 27.68
Pounds Per Cubic Inch Kilograms Per Cubic Meter 2.768 × 104
Pounds Per Cubic Inch Pounds Per Cubic Foot 1,728
Pounds Per Square Foot Atmospheres 4.725 × 10–4
Pounds Per Square Foot Feet of Water at 62° F 0.01602
Pounds Per Square Foot Inches of Mercury 0.01414
Pounds Per Square Foot Kilograms Per Square Meter 4.882
Pounds Per Square Foot Pounds Per Square Inch 6.944 × 10–3
Pounds Per Square Foot Kilograms Per Square Centimeter 4.883 × 10–4
Pounds Per Square Inch Atmospheres 0.06804
Pounds Per Square Inch Feet of Water at 62° F 2.307
Pounds Per Square Inch Inches of Mercury at 62° F 2.036
Pounds Per Square Inch Kilograms Per Square Meter 703.1
Pounds Per Square Inch Kilograms Per Square Centimeter 0.07031
Pounds Per Square Inch Pounds Per Square Foot 144.0
Q
Quadrants (Angle) Degrees 90.0
Quadrants (Angle) Minutes 5,400.0
Quadrants (Angle) Radians 1.571
Quadrants (Angle) Seconds 3.24 × 105
Quarts (Dry) Cubic Inches 67.20
Quarts (Liquid) Cubic Centimeters 946.4
Quarts (Liquid) Cubic Feet 0.03342
Quarts (Liquid) Cubic Inches 57.75
422

–4
Quarts (Liquid) Cubic Meters 9.464 × 10
–3
Quarts (Liquid) Cubic Yards 1.238 × 10
Quarts (Liquid) Gallons 0.25
Quarts (Liquid) Liters 0.9463
Quintal, Argentine Pounds 101.28
Quintal, Brazil Pounds 129.54
Quintal, Castile, Peru Pounds 101.43
Quintal, Chile Pounds 101.41
Quintal, Mexico Pounds 101.47
Quintal, Metric Pounds 220.46
R
Radians Degrees 57.30
Radians Minutes 3,438
Radians Quadrants 0.6366
5
Radians Seconds 2.063 × 10
Radians Per Second Revolutions Per Second 0.1592
Radians Per Second Per Second Revolutions Per Minute Per Minute 573.0
Radians Per Second Per Second Revolutions Per Minute Per Second 9.549
Radians Per Second Per Second Revolutions Per Second Per Second 0.1592
Revolutions Degrees 360.0
Revolutions Quadrants 4.0
Revolutions Radians 6.283
Revolutions Per Minute Degrees Per Second 6.0
Revolutions Per Minute Radians Per Second 0.1047
Revolutions Per Minute Revolutions Per Second 0.01667
–3
Revolutions Per Minute Per Minute Radians Per Second Per Second 1.745 × 10
Revolutions Per Minute Per Minute Revolutions Per Minute Per Second 0.01667
–4
Revolutions Per Minute Per Minute Revolutions Per Second Per Second 2.778 × 10
Revolutions Per Second Degrees Per Second 360.0
Revolutions Per Second Radians Per Second 6.283
Revolutions Per Second Revolutions Per Minute 60.06
Revolutions Per Second Per Second Radians Per Second Per Second 6.283
Revolutions Per Second Per Second Revolutions Per Minute Per Minute 3,600.0
Revolutions Per Second Per Second Revolutions Per Minute Per Second 60.0
Rod Gunter’s Chain .25
Rod Meters 5.029
Rods (Surveyors’ Measure) Yards 5.5
Rods Feet 16.5
423
S
Seconds (Angle) Degrees 2.778 × 10–4
Seconds (Angle) Minutes 0.01667
Seconds (Angle) Quadrants 3.087 × 10–6
Seconds (Angle) Radians 4.848 × 10–6
Section (Land Measure) Square Mile 1.000
Square Centimeters Square Feet 1.076 × 10–3
Square Centimeters Square Inches 0.1550
Square Centimeters Square Meters 0.0001
Square Centimeters Square Miles 3.861 × 10–11
Square Centimeters Square Millimeters 100.0
Square Centimeters Square Yards 1.196 × 10–4
Square Feet Acres 2.296 × 10–5
Square Feet Square Centimeters 929.0
Square Feet Square Inches 144.0
Square Feet Square Meters 0.09290
Square Feet Square Miles 3.587 × 10–8
Square Feet Square Millimeters 9.290 × 104
Square Feet Square Yards 0.1111
Square Inch Square Centimeters 6.452
Square Inch Square Feet 6.944 × 10–3
Square Inch Square Millimeters 645.2
Square Inch Square Yards 7.716 × 10–4
Square Kilometers Acres 247.1
Square Kilometers Square Centimeters 1010
Square Kilometers Square Feet 10.76 × 106
Square Kilometers Square Inches 1.550 × 109
Square Kilometers Square Meters 106
Square Kilometers Square Miles 0.3861
Square Kilometers Square Yards 1.196 × 106
Square Meters Acres 2.471 × 10–4
Square Meters Square Centimeters 104
Square Meters Square Feet 10.76
Square Meters Square Inches 1,550
Square Meters Square Miles 3.861 × 10–7
Square Meters Square Millimeters 106
Square Meters Square Yards 1.196
Square Miles Acres 640.0
Square Miles Square Feet 27.88 × 106
424

Square Miles Square Kilometers 2.590
Square Miles Square Meters 2.590 × 106
Square Miles Square Yards 3.098 × 106
Square Millimeters Square Centimeters 0.01
Square Millimeters Square Feet 1.076 × 10–5
Square Millimeters Square Inches 1.550 × 10–3
Square Yard Acres 2.066 × 10–4
Square Yard Square Centimeters 8,361
Square Yard Square Feet 9.0
Square Yard Square Inches 1,296
Square Yard Square Meters 0.8361
Square Yard Square Miles 3.228 × 10-7
Square Yard Square Millimeters 8.361 × 105
T
Temperature (° C) (+273K) Absolute Temperature (° C) 1.0
Temperature (° C) (+17.8) Temperature (° F) 1.8
Temperature (° F) (+460K) Absolute Temperature (° F) 1.0
Temperature (° F) (−32) Temperature (° C) 5/9
Toise French Feet 6.0
Tons (Long) Kilograms 1,016
Tons (Long) Pounds 2,240
Tons (Long) Tons (Short) 1.120
Tons (Metric) Kilograms 1,000
Tons (Metric) Pounds 2,200
Tons (Short) Kilograms 907.18486
Tons (Short) Ounces 32,000
Tons (Short) Ounces (Troy) 29,166.66
Tons (Short) Pounds 2,000
Tons (Short) Pounds (Troy) 2,430.56
Tons (Short) Tons (Long) 0.89287
Tons (Short) Tons (Metric) 0.90718
Tons (Short) Per Square Foot Kilograms Per Square Meter 9,765
Tons (Short) Per Square Foot Pounds Per Square Inch 2,000
Tons of Water Per 24 Hours Pounds of Water Per Hour 83.333
Tons of Water Per 24 Hours Gallons Per Minute 0.16643
Tons of Water Per 24 Hours Cubic Feet Per Hour 1.3349
Township Square Miles 36.0
425
V
Volt Ampere British Thermal Units Per Hour 3.41214
Volt Ampere British Thermal Units Per Minute 0.05687
Volt Ampere British Thermal Units Per Second 0.00095
Volt Ampere Horsepower (International) 0.001341
Volt Ampere Horsepower (Electric) 0.0013405
Volt Ampere Horsepower (Metric) 0.0013596
Volt Ampere Horsepower (Water) 0.0013404
Volt Ampere Kilowatt 0.001
Volt Ampere Watt 1.00
W
Watts British Thermal Units Per Hour 3.4192
Watts British Thermal Units Per Minute 0.056869
Watts Foot Pounds-Force Per Minute 44.2537
Watts Foot Pound-Force Per Second 0.73756
Watts Horsepower 1.341 × 10–3
Watts Horsepower (Metric) 1.360 × 10–3
Watts Kilowatts 0.001
Watts (Absolute) British Thermal Unit (Mean) Per Minute 0.056869
Watt-Hours British Thermal Units 3.415
Watt-Hours Foot-Pounds 2,656
Watt-Hours Horsepower-Hours 1.341 × 10–3
Watt-Hours Kilowatt-Hours 0.001
Watt (International) Watt (Absolute) 1.0002
Y
Yards Centimeters 91.44
Yards Kilometers 9.144 × 10–4
Yards Meters 0.9144
Yards Miles (Nautical) 4.934 × 10–4
Yards Miles (Statute) 5.682 × 10–4
Yards Millimeters 914.4
Yard Inches 36.00
Yard Feet 3.00
These quick reference tables and conversion factors have been offered for reference
purposes only and all users are cautioned to verify their accuracy.
426
Appendix E
Useful Data
Plane Figures
Definition: A plane figure is a surface bounded by either straight or curved lines and
having no thickness.
Circle
2/3 d
Useful Formulas h d
Pi (π ) = 3.1416
Neutral Axis
Circumference = π D
D/2=RD/2=R
Radi Radius
1/3 d
900
R
π D2
Area = = R2
Diameter
us
Neutral 4
R
D
Axis 3 2 b
Diameter
Neurtral Approx.Area = D
4
D
Axis Angle a
a Length of Arc = πD
Angle
360
a a Arc x R
Arc Area of Sector = π R2 = C
360 2
c
Arc
use
oten
Ellipse p
B Hy
B Useful Formulas
D 900
2 Pi (π ) = 3.1416
D Neutral Axis a b
D A π BD B
2 Area = Adjancent Side
D Neutral Axis 4
B2 + D2
Perimeter (approx.) = 2π
8
427
Useful Data
Right Triangle
Useful Formulas
2/3 d Perimeter = h + b + d
h
d bd
Area =
Neutral Axis 2
D/2=R
us
2/3 d
1/3 d
h
Radi
900 d
R
urtral Neutral Axis

is b
D/2=R
us
1/3 d
Radi
900
R
Angle
a
b
Arc c
Angle
a
Arc C 900 + Angle a + Angle c = 1800

c
B Note: Sides of triangle shown in sketch
are for angle a.
Opposite Side
use
D ten
Opposite Side ( BC )
po 900
B 2 Hy
Neutral Axis a b Sine a =
Hypotenuse ( AC )
Adjacent Side ( AB )
D 900
2
Neutral Axis a b Cosine a =
A
Adjancent Side
B Hypotenuse ( AC )
Opposite Side ( BC )
Tangent a =
Adjacent Side ( AB )
428
Useful Data
Common Right Triangles
Useful Formulas
Functions of angles in 30and 60 triangle, and 45 triangle are as follows:
1 1
Sine 30=

= .50000 Sine 45=
= .70711
2 2
3 3
Sine 60
= .86603
= 
Cosine 30
= 
= .86603
2 2
1 1
Cosine 45 = = .70711 Cosine 60= 
= .50000
2 2
1 1
Tangent 30 =
= .57735
= Tangent 45 = 1.0000
3 1
3
Tangent 60
= 
= 1.7321
1
Acute and Obtuse Triangles
Useful Formulas
Perimeter = A + B + C
BD
Area =
2
1800
Angles a + b + c =
Sin a Sin b Sin c
= =
A B C
2 2 2
A = B + C − 2 BC Cos a
When all of the angles of one acute (or obtuse) triangle are equal to the angles of
another acute (or obtuse) triangle then the triangles are similar and the sides are proportion-
ate as shown above for right triangles.
429
Useful Data
Irregular Areas
Irregular areas may be found by

dividing into a number of regular areas and
summing up or by the use of Simpson’s Rule
given below:
Simpson’s Rule for Irregular Areas

Divide area into even number of pan-
els by means of parallel lines spaced equal
distance b apart.
Then Area=
1
b ( D + D8 ) + 4 ( D1 + D3 + D5 + D7 ) + 2 ( D 2 + D 4 + D6 ) 
3 
The greater the number of panels into which the irregular area is divided, the more
accurate will be the solution.
Solid Figures
Definition: A solid has length, width and thickness or depth.
Cube
Useful Formulas
Surface Area = 6 A2
Volume = A3
Rectangular Solid
Useful Formulas
Surface Area = 2 AC + 2 AB + 2 BC
Volume=A x B x C
Sphere
Useful Formulas
Pi (π ) = 3.1416
Surface Area = π D 2
4 π D3
Volume = π R3 =
3 6
430
Useful Data
Pyramid or Cone
Useful Formulas
Perimeter of base x L
Surface Area =
2
Area of base ( B ) xH
Volume =
3
Frustum of Pyramid or Cone

Useful Formulas
B = Area Base P = Perimeter Base
b = Area Top p = Perimeter Top
L = Slant Height H = Perpendicular Height
Surface=
Area
( P + p) L + B + b
2
H
Volume
=
3
(
B + b + Bb )
Cylinder
Useful Formula
Pi (π ) = 3.1416
= 2π R 2 + π DH
Surface Area
π D2 H
= π=
Volume R2 H
4
Irregular Volumes
(PRISMOIDAL FORMULA)
Useful Formulas
A1and A3 = End areas
A2 = Area at mid section
L = Perpendicular distance between parallel end areas
A1 + 4 A2 + A3
Volume = xL
6
431
Useful Data
Useful Algebraic Equations

Factors and Expansions
( A ± B ) =A2 ± 2 AB + B 2
2
( A ± B ) =A3 ± 3 A2 B + 3 AB 2 ± B3
3
A2 − B 2 = ( A + B )( A − B )
n ( n − 1) n − 2 2 − n ( n − 1)( n − 2 ) n −3 3 n
( A + B=) A nA B +
n n n −1
A B + A B KB
2! 3!
Quadratic Equation
In any equation ax 2 + bx + c =0
−b ± b 2 − 4ac
x=
2a
Powers and Roots
Ax x A y = A(
x+ y)
Ax
= A( )
x− y
y
A
( AB )
x
= Ax B x
1
A− x =
Ax
x
 A Ax
  = x
B B
Sum of Numbers
N ( N + 1)
Sum of (N) numbers = 1 + 2 + 3 + 4 K + N =
2
432
Useful Data
Arithmetic Progression
F=First term
D=Common difference
S=Sum of N terms
L=Last term
N=Number of terms
L = F + ( N − 1) D
N
S= ( F + L)
2
Combinations
(M) denotes the number of combinations of (N) things taken (P) at a time
! = Factorial e.g. 5! = 5 x 4 x3 x 2 x1
N!
M=
P !( N − P )!
Basic Physical Laws

Newton’s Laws of Motion
1. Every body continues in its state of rest or uniform motion and direction unless
acted upon by some outside force.
2. Change of motion is proportional to force applied and takes place in the direc-
tion of the line of action of the force.
3. To every action there is an equal and opposite reaction.
Hook’s Law of Stress and Strain

Within the elastic limit of any body the ratio of stress to strain produced is
constant.
Pascal’s Law of Liquid Pressure

Pressure exerted at any point upon the mass of a liquid is transmitted undiminished
in all directions.
Archimedes’ Principle of Buoyancy and Displacement

A body wholly or partly immersed in a fluid is buoyed up by a force equal to the
weight of the fluid displaced.
433
Useful Data
Boyle’s Law of Gas Pressure and Volume

For a perfect gas, changing from pressure P and volume V to pressure P’ and vol-
ume V’ without change of temperature PV = P’V’
Ohm’s Law of Electric Current

Current I (amperes) in terms of electromotive force E (volts) and resistance
R (Ohms)
E
I=
R
Fundamental Mechanics
Velocity
If S is the distance passed over in time T, the velocity is
S
v=
T
Uniformly Accelerated Motion

If Vo is the initial velocity, Vt the velocity after time T, the acceleration is
Vt − Vo
a =
T
Vt
= V 0 + aT
1
S
= VoT + aT 2
2
Falling Bodies
Symbols same as for uniformly accelerated motion except that Vo= O and g is the
2
acceleration due to gravity = 32.2 Ft/sec .
Vt = gT
1
S = gT 2
2
Momentum
A mass m moving with a velocity V has a momentum M.
M =mV
Force
For a mass m and an acceleration a, the force F is
F =ma
434
Useful Data
Pressure
The unit pressure P due to a force F distributed over an area A is
F
P=
A
Useful Information
• To find the diameter of a circle, multiply its circumference by .31831.
• To find the area of a circle, multiply the square of its diameter by .7854.
• Doubling the diameter of a circle increases its area four times.
1
• A gallon of water (U.S. standard) weighs 8 /3 pounds and contains 231 cubic
inches.
• A cubic foot of water contains 7 ½ gallons, 1,728 cubic inches, and weighs 62½
pounds.
• Area of ellipse = the product of both diameters multiplied by .7854.
• Area of a parallelogram = base multiplied by altitude.
• To find the side of an inscribed square, multiply its diameter by .7071 or multi-
ply its circumference by .2251 or divide its circumference by 4.4428.
• Side of inscribed cube = radius of sphere multiplied by 1.1547.
• To find the side of an equal square, multiply the diameter by .8862.
• Square. A side multiplied by 1.4142 equals the diameter of its circumscribing
circle.
• Square. A side multiplied by 4.443 equals the circumference of its circumscrib-
ing circle.
• Square. A side multiplied by 1.128 equals the diameter of an equal circle.
• Square. A side multiplied by 3.547 equals the circumference of an equal circle.
• To find the cubic inches in a ball, multiply the cube of its diameter by .5236.
• To find the cubic contents of a cone, multiply the area of its base by 1/3 the
altitude.
• Surface of frustum of cone or pyramid = sum of circumference of both ends
multiplied by ½ slant height plus area of both ends.
• Contents of frustum of cone or pyramid = multiply area of two ends to get the
square root. Add the two areas and multiply by 1/ altitude.
• Doubling the diameter of a pipe increases its capacity four times.
• To find the pressure in pounds per square inch of a column of water, multiply
the height of the column in feet by .434.
• Steam rising from water at its boiling point (212º F) has a pressure equal to the
atmosphere (14.7 pounds per square inch).
435
Useful Data
• A standard horsepower: the evaporation of 30 pounds of water per hour from

a feed water temperature of 100º F into steam at 70 pounds gauge pressure.
• To find the capacity of tanks of any size (in U.S. gallons), given dimensions of
a cylinder in inches: square the diameter, multiply by the length and by .0034.
• To ascertain the heating surface in tubular boilers, multiply by 2/3 the circum-
ference of the boiler by the length of the boiler in inches and add to it the area
of all the tubes.
Round Tank Capacity per foot of depth
Diameter Diameter
Gallons U.S. Gallons Gallons U.S. Gallons
1’ 5.87 9’ 475.89
1’3” 9.18 9’6” 530.24
1’6” 13.22 10’ 587.52
1’9” 17.99 10’6” 647.74
2’ 23.50 11’ 710.90
2’3” 29.74 11’6” 776.99
2’6” 36.72 12’ 846.08
2’9” 44.43 12’6” 918.00
3’ 52.88 13’ 992.91
3’3” 62.06 13’6” 1070.80
3’6” 71.97 14’ 1151.50
3’9” 82.62 14’6” 1235.30
4’ 94.00 15’ 1321.90
4’3” 106.12 16’ 1504.10
4’6” 118.97 17’ 1697.90
4’9” 132.56 18’ 1903.60
5’ 146.88 20’ 2350.10
5’6” 177.72 25’ 3672.00
6’ 211.51 30’ 5287.70
6’6” 248.23 40’ 9400.00
7’ 287.88 50’ 14688.00
7’6” 330.48 60’ 21150.00
8’ 376.01 75’ 33048.00
8’6” 424.48 100’ 58750.00
436
Useful Data
Steel Bars – Nominal Weight

NOTE: Nominal weights are theoretically derived and may differ from
actual weights.
The following are Pounds Per Foot
Size in Round Square Hexagon Octagon
inches Bars Bars Bars Bars
¼ .167 .213 .184 .176
½ .668 .850 .736 .704
¾ 1.50 1.91 1.66 1.584
1 2.67 3.40 2.94 2.817
1¼ 4.17 5.31 4.60 4.401
1½ 6.01 7.65 6.63 6.338
1¾ 8.18 10.41 9.02 8.626
2 10.68 13.60 11.78 11.27
2¼ 13.52 17.21 14.91 14.26
2½ 16.69 21.25 18.40 17.60
2¾ 20.19 25.71 22.27 21.30
3 24.03 30.60 26.50 25.35
3¼ 28.20 35.91 31.10 29.75
3½ 32.71 41.65 36.07 34.50
3¾ 37.55 47.81 41.41 39.61
4 42.73 54.40 47.11 45.07
5 66.76 85.00 73.61 70.42
6 96.13 122.40 106.00 101.40
437
Useful Data
Flat Steel Bars and Plates – Nominal Weight

NOTE: Nominal weights are theoretically derived and may differ from
actual weights.
The following are for 1” wide × 12” long. To find weight per foot of flat steel,
multiply thickness (in inches) by the multiplier listed below:
Thickness Multiplier Thickness Multiplier Thickness Multiplier

1/16” .2125 1” 3.400 2” 6.800
1/8” .4250 1 1/16” 3.613 2 1/8” 7.225
3/16” .6375 1 1/8” 3.825 2 1/4” 7.650
1/4” .8500 1 3/16” 4.038 2 3/8” 8.075
5/16” 1.0600 1 1/4” 4.250 2 1/2” 8.500
3/8” 1.2750 1 5/16” 4.463 2 5/8” 8.925
7/16” 1.4880 1 3/8” 4.675 2 3/4” 9.350
1/2” 1.7000 1 7/16” 4.888 2 7/8” 9.775
9/16” 1.9130 1 1/2” 5.100 3” 10.200
5/8” 2.1250 1 9/16” 5.313
11/16” 2.3380 1 5/8” 5.525
3/4” 2.5500 1 11/16” 5.738
13/16” 2.7630 1 3/4” 5.950
7/8” 2.9750 1 13/16” 6.163
15/16” 3.1880 1 7/8” 6.375
1 15/16” 6.588
438
Appendix F
Licensing of MTS Appraisers
Today, the licensing and certification of real estate appraisers is well established.
In contrast, there are currently no federally mandated licensing requirements for the MTS
appraiser or other personal property appraisers.1
Historically, developments in real estate appraisal have preceded those in other
appraisal disciplines. To understand the direction in which licensing of MTS appraisers
may be headed; it may be instructive to study the origin and history of the licensing of real
estate appraisers.
What follows provides a historical perspective on the savings and loan crisis that
occurred in the 1980s, the legislation and organizations that were formed as a result of the
crisis, and the effects of these events on the appraisal profession. The current situation is
described, including a brief description of the state certification and licensing agencies. The
pros, cons, costs, and benefits of licensing are discussed. Additional references provided
throughout the chapter will aid those who would like to obtain further information on the
subject. This section does not address developments after early 2005.
Origins and History of Licensing of Real Estate Appraisers

The origins of existing licensing and certification of real estate appraisers can be
traced to the savings and loan (S&L) debacle in the United States, which culminated in
massive failures of S&L institutions during the 1980s and early 1990s. Before the S&L
crisis, the federal government did not impose licensing or certification requirements on
appraisers, although a few states had licensing requirements. In most states, anyone could
represent himself as an appraiser. Although codes of conduct and professional standards
were maintained by various professional societies and organizations, appraisers and ap-
praisals were essentially unregulated.
An important factor contributing to the failure of many S&Ls was the excessive
loan-to-value ratios contained in their real estate loan portfolios. An excessive loan-to-
value ratio occurs when the value of collateral held against a loan is less than the outstand-
ing debt. Often, this condition is not realized until a borrower fails to pay on an outstanding
loan. The lender then forecloses on the loan and liquidates the property to satisfy the debt.
When the sale price of the property is insufficient to cover the amount of the outstanding
debt, a loss is suffered. If the borrower cannot provide the difference in funds between the
sale price and the loan amount, and the lender has no other recourse, the lender suffers the
loss.
Fraud and incompetent management were two other factors precipitating the S&L
failures. As the S&L crisis grew, the focus shifted to a common problem in many loan
packages: the value of the collateral property was less than the outstanding debt. There
are two primary reasons for this situation: (1) overstated property values, which resulted
in lenders over advancing against the collateral pledged on the loan; and (2) improper
439
property liquidation methods, which brought less than market value at the liquidation sale
of the property. Over-stated property values were in part based upon fraudulent or overly
optimistic appraisals supplied to overzealous lenders who, in turn, granted excessive loans.
An improper liquidation showed that the collateral was sold at less than market value
through poor sales techniques, incompetence, or fraud. Appraisers naturally argued that
poor collateral sales were the problem, and property liquidators and auctioneers blamed
faulty appraisals. Ultimately, both conditions were shown to exist.
Federal Actions and the Appraisal Subcommittee

The massive S&L failures, which involved the lending of funds insured by the
Federal Deposit Insurance Corporation (FDIC), necessitated federal government involve-
ment in the crisis. As insured losses soared, the federal government attempted to shore up
the collapsing S&L industry.
In August 1989, Congress passed the Financial Institutions Reform Recovery and
Enforcement Act of 1989 (FIRREA). This act established the Appraisal Subcommittee
(ASC) of the Federal Financial Institutions Examination Council (FFIEC)
The ASC has 6 members, each designated respectively by the heads of the Office of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve System,
the FDIC, the Office of Thrift Supervision, the National Credit Union Administration, and
the U.S. Department of Housing and Urban Development.
Section 1103 of Title XI sets out the ASC’s general responsibilities:
• Monitor the requirements established by the States, territories, and the Dis-
trict of Columbia (“States” and their appraiser regulatory agencies to “state
agencies”) for the certification and licensing of appraisers. The ASC reviews
each State’s compliance with the requirements of Title XI and is authorized
by Title XI to take action against noncomplying States;
• Monitor the requirements established by the Agencies regarding appraisal
standards for federally related transactions and determinations of which fed-
erally related transactions will require the services of State licensed or State
certified appraisers;
• Maintain a national registry of State licensed and certified appraisers (“Reg-
istry”) who may perform appraisals in connection with federally related
transactions;
• Monitor and review the practices, procedures, activities and organizational
structure of the Appraisal Foundation (“Foundation”); Transmit an annual
report to Congress regarding the activities of the ASC during the preceding
year.2
Appraisal Subcommittee Study

Section 1122(e) of Title XI of FIRREA mandated that the ASC conduct a study
to determine the feasibility and desirability of extending the provisions of Title XI to the
function of personal property appraisal and personal property appraisers in connection with
federal financial and public policy interests. The ASC conducted such a study and published
a report of its conclusions in March 1991 under the title Personal Property Appraisal Study.
440
The report was prepared from surveys. The majority of public comments and responses
came from institutional appraisal users. There were 666 respondents, including 415 state
banks, 111 national banks, 13 credit unions, 10 savings institutions or savings banks, and
33 financial institutions’ trade associations. The remaining 84 respondents were holding
companies, appraisal firms, individuals, trade organizations, state and federal agencies, and
other individuals or miscellaneous companies.
The report was divided into three sections: public comments, feasibility, and desir-
ability. The following discussion recapitulates the report contents and conclusions. The
results provide a broad spectrum of viewpoints related to the licensing of personal property
appraisers and a look at how the decision was made to not recommend federally mandated
licensing for personal property appraisers.
In the public comments section, one of the first things included is a definition of
personal property: “identifiable, portable and tangible objects which are considered by the
general public as being ‘personal,’ e.g., furnishings, artwork, antiques, gems and jewelry,
collectibles, machinery and equipment: all property that is not classified as real estate.”
The ASC questions for public comment focused specifically on what types of
personal property collateral might be responsible for the greatest losses, or conversely,
for having the best record. The subcommittee also attempted to determine whether there
was a direct link between losses and faulty evaluation of collateral. Most of the responses
received were nonspecific as to property types and anecdotal in nature. Automobiles
were mentioned as a large loss generator. Automobiles, however, represented a very large
percentage of the total outstanding loans and these conditions basically balanced. There
were specific comments regarding agriculture-related products and equipment losses. This
was consistent with a large response from Midwestern lenders who had concentrations
of agricultural-related equipment in their portfolios. The public comments section of the
subcommittee report states:
The responses almost unanimously indicate that losses have not been sustained as
a result of faulty evaluation of personal property collateral. While losses were suffered on
personal property lending, the following reasons were given for those losses:
• changes in prevailing market conditions and resultant inability of borrower to
make interest and principal payments,
• deterioration in the value of the underlying collateral at a rate faster than the
loan amortizes,
• drastically lower liquidation value than the original valuation,
• failure to perfect a security interest in the collateral,
• disappearing collateral or substitution of the original collateral, and
• poor maintenance of collateral resulting in accelerated depreciation.3
Also detailed in the public comments section was the respondents’ general percep-
tion that, to a large extent, Title XI requirements were not applicable to personal property
appraisals. For personal property loans, secondary sources of reliance and repayment have
to be taken into account. Consideration has to be given to the other basic elements of
credit (the “five Cs”)—capacity, credit history, character, common sense, and collateral.
Many fundamental differences between real estate and personal property loans were iden-
441
tified, principally the great diversity of personal property (for example, gems, jewelry,
and machinery and equipment). Each of these areas is unique and would require special
consideration for licensing purposes. The many different premises of value for personal
property were mentioned. It was also pointed out that loan-to-value ratios for personal
property loans were usually lower than those for real estate.
The public comments section also addressed personal property appraisal standards.
This section mentioned standards 7 and 8 of USPAP, which deal with personal property ap-
praisers and appraisals. The study concluded that the field is too diverse to develop one set
of meaningful uniform standards. Another opinion, endorsed primarily by appraisers and
appraisal associations, supported the development of one set of uniform standards, generic
in nature. The study pointed out that Title XI specifically defines the licensing procedures
and qualification criteria for real estate appraisers.
The debate continues about whether licenses should be specific to property type
or generic for all personal property. The consensus of those who supported generic stan-
dards is a single licensing process. Ultimately, most respondents believed that the time and
cost required to develop, implement, and administer a personal property certification and
licensing program would outweigh the benefits to the public, considering there have not
been sustained lending losses be-cause of faulty valuations in this area.
Questions relating to the regulation and supervision of personal property appraisers
drew inconsistent responses. The basic questions were
• Who should develop standards, qualifications, and testing criteria?
• Who should have supervisory enforcement of the standards if developed?
The study showed a preference for personal property appraisal organizations and
financial institutions taking control instead of regulatory agencies or legislative bodies. It
was suggested that the appraisal organizations assume responsibility for qualification and
testing and that their registry fees be affordable, yet high enough to cover supervision costs.
Most commentary did not support a primary role for federal agencies in the enforcement of
standards, but a majority did support federal monitoring.
It was reported that 643 of the 666 respondents opposed extending the real estate
appraisal regulatory framework to personal property appraisal. Seventeen supported it and
six took no stance. It is interesting to note that the opposition to the licensing of personal
property appraisers came mainly from appraisal users. Supporters of licensing were mainly
those within the appraisal community.
The second section of the study dealt with the feasibility of certification and li-
censing for personal property appraisers. The ASC determined that it is feasible to certify
and license personal property appraisers in a framework similar to Title XI. However,
comments were made that were similar to those in the public comments section. Two com-
ments in the ASC study under the feasibility section are (1) personal property is too diverse
in nature to allow for one set of meaningful uniform standards; and (2) it is difficult to
obtain qualified appraisals in small and rural communities because of the limited number
of personal property appraisers.
The ASC reasoned that implementation is feasible only if the standards are very
generic in nature. The subcommittee did not believe that categories (or even groupings of
categories) were feasible. The basic conclusions were:
442
• Generally, the valuation of collateral for loan purposes is done in specific

steps. In the broadest sense, the property is identified, the purpose of the ap-
praisal understood, and the value estimated.
• Although the development of generic standards is feasible, implementation
of licensing or certification requirements would be far more difficult. A wide
range of people who are not designated appraisers presently provide valuation
services. For instance, bank employees regularly use automobile price guides
to determine the collateral value of automobiles. Any attempt to license or
certify such individuals is feasible only over an extended time period.
The ASC concluded that the extension of the real estate appraisal framework for
licensing or certification was feasible but stressed that the standards and competency re-
quirements should be generic.
They estimated that it would take 3–5 years to implement even minimal personal
property appraisal standards and competency criteria.
The results from the desirability portion of the study led the ASC to conclude that
certification and licensing of personal property appraisers is neither desirable nor neces-
sary. The primary reason for this finding was that the committee had been “unable to docu-
ment any recurring patterns of abuse or evidence that significant systemic losses have been
sustained by insured financial institutions, the Resolution Trust Corporation, the FDIC, or
the National Credit Union Share Insurance Fund as a result of faulty valuation of personal
property.”
The comment section of the study focused on two issues:
• There was no evidence to show that losses have resulted from loans where
personal property served as collateral.
• No reason exists to believe that regulation of personal property appraisals or
appraisers would have prevented any losses that have occurred.
These comments indicate the ASC recognized that there are inherent differences
in the nature of personal and real property and that lending practices differ between them.
Most lenders have historically viewed personal property loans to be more risky than real
estate transactions. Real estate is less likely to suffer loss in value through use and less
likely to suffer uninsured destruction. Personal property lenders typically require larger
down payments and offer shorter-term loans.
The automotive financial institutions are the largest group of personal property
lenders. They are followed by equipment lessors, who lend a large percentage of the money
used in personal property financing. These kinds of institutions typically have internal staff
evaluate exposure in the loan and lease portfolios and often do not retain outside appraisers.
The federal government’s position on the certification and licensing of personal
property appraisers remains unchanged from the time of the study. Nevertheless, some
states and some professional appraisal organizations continue to debate the subject. Each
of the states has regulating bodies created in response to Title XI. At a time when many
government jobs are being eliminated and spending is being cut, it is possible that a new
source of revenue from professional fees would receive special attention from state govern-
ment bureaucracies.
443
The Appraisal Foundation

The Appraisal Foundation is another entity that was created as a result of the S&L
crisis. In the mid-1980s, as the S&L crisis grew, it became clear to the real estate appraisal
community that government regulation of some sort was forthcoming. Concerns over the
practicality of impending regulations led to the formation of an ad hoc committee of ap-
praisal practitioners. The group was primarily composed of real estate appraisers because
the losses suffered in the S&L crisis were related to real estate development and loans.
The goal of the ad hoc committee was to provide input to government regulators from
a united appraisal voice. The intent of the committee was to aid in the development of
sensible requirements for the appraisal profession. This ad hoc committee grew to become
the Appraisal Foundation, which was incorporated as a not-for-profit corporation in Illinois
in November 1987.
By the time the Appraisal Foundation was incorporated, the ad hoc committee had
already developed a set of uniform standards for the appraisal profession. These same
standards were copyrighted in 1987 by the Appraisal Foundation as the Uniform Standards
of Professional Appraisal Practice (USPAP). Students of the appraisal profession must be
aware of USPAP because these standards have been adopted by virtually all professional
appraisal organizations in the United States, by most state and federal agencies, and by
some foreign governments and organizations. The Appraisal Foundation continues to work
closely with federal financial institutions, regulatory agencies, and the ASC.
The Appraisal Foundation, through the Appraisal Standards Board, is now the pri-
mary developer of USPAP. In addition to appraisers, it serves the ASC, other governmental
bodies, users of appraisal services, and the public at large. The Foundation is comprised of
representatives from various professional appraisal organizations. It has significant influ-
ence on regulation of the appraisal community. This is especially true with respect to the
licensing, certification standards, and qualifications of appraisers.
In 1989, the Appraisal Foundation established two groups to oversee the develop-
ment and continuing administration of standards and professional criteria for appraisals
and appraisers:
• Appraisal Standards Board (ASB)
• Appraiser Qualifications Board (AQB)
The ASB was given the charter to develop, publish, interpret, and amend appraisal
standards. The ASB adopted USPAP and continues to develop and administer it as an
evolving document.
The AQB was formed to develop, publish, interpret, and amend qualification cri-
teria for professional appraisers. In March 1991, it adopted qualification criteria for real
estate appraisers. The criteria are included in the publication Interpretations and Clarifica-
tions of the Criteria.
In 1992, the Office of Management and Budget (OMB) issued Bulletin 92-06 re-
garding the use of real estate appraisals by the agencies under its jurisdiction. Among other
things, the bulletin adopted the AQB criteria as the level of training its agencies should pro-
vide to its appraisal employees. In 1994, the AQB announced that it had decided to pursue
the development of personal property appraiser criteria. In 1996, the AQB announced the
444
same intention for business valuation. Many people believe these announcements signal a
move in the direction of licensing for appraisers of property other than real estate.
Federal License Requirements

With the enactment of FIRREA in 1989, the federal government mandated that
all states develop appraiser certification and licensing bodies. Title XI of FIRREA estab-
lished the ASC as the federal agency to monitor and supervise these bodies. The Appraisal
Foundation and its boards have been recognized as authorities by federal and state regula-
tors. The USPAP and AQB criteria have been adopted as minimum requirements. Federal
requirements for the licensing and certification of personal property appraisers currently
do not exist. Real estate appraisers are licensed and regulated only at the state level. The
National Registry of State Certified and Licensed Appraisers is maintained by the ASC in
compliance with Title XI of FIRREA.
Federal and state regulation of the real estate appraisal community was developed
between 1987 and 1995. In its annual report to Congress in January 1994, the ASC reported
that “1993 was the first year that Title XI was fully in place and related federal and state
regulatory programs were in full operation.” In retrospect, much has occurred in a short
period. Increased regulation and additional requirements are likely to occur now that the
structure for regulation is in place in the form of state agencies, the Appraisal Foundation,
and the ASC.
State Certification and Licensing Regulatory Agencies

Each state has a designated agency to administer the certification and licensing of
real estate appraisers. Each state has established minimum requirements in terms of educa-
tion, experience, and testing in accordance with Title XI of FIRREA. These minimums
equal or exceed the criteria established by AQB and standards established by the ASB
of the Appraisal Foundation. As part of its certification and licensing program, each state
is required to provide the ASC with a list of all of its certified and licensed appraisers.
The list and required fees are collected and supplied to the National Registry of Certified
Appraisers.
The ASC opined that Title XI “intends that states supervise all of the activities
and practices of persons who are certified or licensed to perform real estate appraisals in
connection with all real estate appraisals involving real estate related financial transac-
tions, and not just federally related transactions.” This statement, published in the January
1994 annual report to Congress, further states that state agencies investigate inappropriate
behavior on the part of licensed appraisers and take disciplinary actions.
Many states have already gone beyond the basic requirements of FIRREA and Title
XI with respect to certification and licensing of appraisers. The information in Table D.1
was issued by the ASC in 1993 and was published by the Appraisal Foundation in its Ap-
praiser Update in September 1993 and updated by the American Society of Appraisers in
2005.
445
STATE RQMT. STATE RQMT.

Alabama M/FRT Nebraska M
Alaska M/FRT Nevada M
Arizona M New Hampshire M/FRT
Arkansas M/FRT New Jersey M
California M/FRT New Mexico M
Colorado M New York V
Connecticut M North Carolina M
Delaware M North Dakota M
District of Columbia M Ohio M/FRT
Florida M/FRT Oklahoma V
Georgia M Oregon M
Hawaii M/FRT Pennsylvania M
Idaho M Rhode Island M/FRT
Illinois M/FRT South Carolina M
Indiana V South Dakota M/FRT
Iowa V Tennessee M
Kansas M/FRT Texas M
Kentucky M/FRT Utah M
Louisiana M Vermont M/FRT
Maine M Virginia M
Maryland M Washington M
Massachusetts M/FRT West Virginia M
Michigan M Wisconsin V
Minnesota M Wyoming M
Mississippi M Puerto Rico M
Missouri M/FRT Virgin Islands M
Montana M/FRT
Requirement Codes
M Mandatory All appraisals must be done by a
licensed or certified appraiser.
M/FRT Mandatory for Federally All appraisals must be done by a
Related Transactions licensed or certified appraiser.
V Voluntary It is left to the discretion of
lenders as to whether an appraiser
must be licensed or certified
to do appraisal work. Lenders,
however, must abide by Title XI.
Table F.1. State real property licensing requirements.
446
Each state has its own entity for the licensing of real estate appraisers. Each state
charges a fee for appraiser certification or licensing. To conduct an appraisal in a federally
related real estate transaction in any state, the appraiser must be licensed in that state or be
recognized for temporary practice by that state. Title XI requires state agencies to recog-
nize, on a temporary basis, the certification or licensing of an appraiser from another state,
provided that (1) the property to be appraised is part of a federally related transaction; (2)
the appraiser’s business is of a temporary nature; and (3) the appraiser registers with the
state appraiser regulatory agency in the state of temporary practice. A nominal per assign-
ment fee can be charged by the state granting the temporary practice permit.
The entire certification and licensing process has become a significant expense for
real estate appraisers. The costs of regulation have been borne by the profession, a result
inherent in the enactment of FIRREA. The Department of the Treasury advanced the initial
federal costs for the ASC with the expectation of being reimbursed after fees were col-
lected. The fees for an appraiser who practices in more than one state can be expensive.
Some appraisers believe these fees are excessive and prohibit them from having a multi-
state practice.
Reciprocity of licenses between states is not the same as a temporary practice per-
mit. Reciprocal arrangements occur as one state accepts part or all of the certifying and
licensing requirements of an-other state. Not all states share reciprocal rights. Real estate
appraisers who practice in more than one state must be sure that they have fulfilled each
state’s requirements.
There are different forms of reciprocal arrangement between states. One arrange-
ment is similar to reciprocal driver’s privileges between states. Under this type of arrange-
ment, a certified and licensed real estate appraiser from another state must simply possess
a valid certificate and be competent to perform the assignment under USPAP. No testing
or additional fees are charged. Another type is a formal reciprocal agreement between
states. A certified real estate appraiser in good standing in one state applies and is granted
certification or licensing in a second state upon review of the appraiser’s existing license
and credentials and receipt of licensing fees. The second state is essentially accepting the
first state’s education requirements and examination process instead of its own; however,
it charges a fee to the appraiser. The third type of reciprocity is an agreement in which, in
addition to the fee, some additional level of education, experience, or testing is required.
All of the reciprocity agreements permit continued appraisal activity, usually for
one year. The requirement for real estate certification and licensing in each state is difficult
for appraisers who continually practice on a multistate basis. An appraiser who has a cli-
ent with facilities in more than one state must be certified in each of those states. This is
also the case for many appraisers who provide allocation of purchase price appraisals of
acquired business entities in other states.
The ASC has stated that it endorses reciprocity between states and urges states to
establish permanent reciprocity arrangements to address the needs of appraisers with mul-
tistate, non temporary practices. A reciprocal agreement similar to the “driver’s license”
type would be preferred by most appraisers. This kind of arrangement would be ideal for
personal property appraisers, especially in light of the past ASC study that indicated little
need for personal property appraiser licensing.
447
Current Situation and Opinions4

In February 1995, the AQB held a public hearing regarding criteria for personal
property appraisers. At that hearing Richard Kaufman, FASA, then the international presi-
dent of the American Society of Appraisers, made formal remarks to the Board. An article
containing those remarks was published in ASA’s March 1995 issue of Newsline. Also
attending the hearing were the chairperson of the Education Committee of the International
Society of Appraisers, the executive director of the Appraisal Association of America, and
the director of the Association of Machinery and Equipment Appraisers. Formal presen-
tations were given by representatives from the United States Marshals Service and the
Equipment Leasing Association. All of the organizations represented spoke in general sup-
port of establishing qualification criteria for personal property appraisers but advised that a
careful and deliberate process be followed. The following excerpts are from the Newsline
article and Kaufman’s remarks to the AQB. The comments address some of the problems
with real estate appraisal licensing in 1995 and also provide insight on prevailing thoughts
on the development of standards, criteria, and regulations for personal property and other
non–real property appraisers.
• The ASA does not see a workable personal property qualification environ-
ment based on the real property requirements of Title XI.
• Real property appraisers did not deserve the amount of regulations that has
evolved from Title XI.
• The ASA would be in favor of a national registry of qualified personal proper-
ty appraisers, similar to the Internal Revenue Service Supervision of Enrolled
Agents and Actuaries or the Securities and Exchange Commission Registra-
tion of Investment Advisers. A national registry of qualified personal property
appraisers would facilitate freedom of temporary practice in any jurisdiction,
a privilege that the real property appraisers do not currently enjoy.
• The ASA supports the development of guidelines for personal property ap-
praisal users. Such guidelines should be established on a mutually and readily
agreeable basis between both the appraiser and the user. If both groups cannot
accept a guideline, then it should not be established.
• There is no pressing national policy or public issue like the S&L crisis that
would require personal property appraisers to be similarly regulated.
• Initial personal property appraiser qualification guidelines might address the
following issues:
– Do they conduct their assignments in accordance with generally

available and relevant standards?
– What general and specific education have they had and how does it
enhance their appraisal abilities?
– What specific experience do they have with the subject of the appraisal,
the purpose of the appraisal, and the function of the appraisal?
448
– What references can they provide to verify their expertise? References

might include previous clients, recognition by courts or other tribunals,
or appropriate professional designations by scientific, artistic, and other
professional societies.
– Are they properly registered as businesses in the communities or states
in which they serve?
– Do they acknowledge the limitations of the appraisal discipline—
real property, personal property, or business appraisal—in which they
choose to practice? Such distinctions have already been recognized by the
Appraisal Foundation and the ASB.
Looking Ahead
No easy answers are available for questions regarding the status of certification and
licensing for appraisers of disciplines other than real estate. No one knows what the future
may hold. The process is ongoing. Interested appraisers and appraisal students should pay
close attention to developments within the ASC and the Appraisal Foundation because it is
these two entities that are recognized by regulators of the appraisal industry.
Notes
1
The licensing of real property appraisers had resulted in some ad hoc regulation of some MTS appraisers in at least some states. In
some states, large items of machinery and equipment are defined as real property; some judicial and administrative bodies in these states
require an appraiser testifying as an expert witness (e.g., in property tax appeals) to possess a real property appraisal license.
2
Appraisal Subcommittee, Annual Report 1999 (Washington, D.C.: Appraisal Subcommittee, 1999), p. 1.
3
Ibid.
4
This section was written in 1998 and updated in early 2005.
449
Appendix G
Published Prices and Sources
of Information
Agriculture
Farm Equipment Manufacturers Association
1000 Executive Parkway, Suite 100, St. Louis, MO 63141-6369
(314) 878-2304; fax (314) 878-1742
www.farmequip.org
Hotline Farm Equipment Guide
Heartland Communications Group, Inc.
1003 Central Avenue, Fort Dodge, IA 50501
(800) 247-2000
www.agdeal.com
Outlook Used Farm Machinery Guide
P.O. Box 427, Carson, IA 51525
(800) 847-7242
www.1st-farmequipment.com
Appraisal
The Appraisal of Real Estate
The Dictionary of Real Estate Appraisal
Nobel L. Davis. “Machinery and Equipment: Cost Trends—How Are They
Used?” Valuation, (Vol. 17, No. 2) 1970.
The Appraisal Institute
550 W. Van Buren Street, Suite 1000, Chicago, IL 60607
(312) 335-4100; fax (312) 335-4400
www.appraisalinstitute.org
Kirit Budhbhatti. Valuation of Plant and Machinery: Theory and Practice.
Chicago, IL: The Appraisal Institute, 1999.
California State Board of Equalization. Assessor’s Handbook General
Appraisal Manual. Sacramento, CA: California State Board of Equalization,
1995.www.boe.ca.gov/proptaxes/ahcont.htm
450
Published Prices and Sources of Information
Circular No. A-76, Appendix 3

OMB
725 17th Street, NW, Washington, DC 20501
(202) 395-3080; fax (202) 395-3888
www.whitehouse.gov/omb
Controller
Sandhills Publishing Company
12010 W. Harvest Drive, Lincoln, NE 68521
(800) 247-4890; fax (402) 479-2135
www.controller.com
Kiplinger Tax Letter
Kiplinger Washington Editors
1729 H Street NW, Washington, DC 20006
(800) 544-0155
www.kiplinger.com
Life Cycle Cost Data with Educational Supplement
McGraw-Hill Companies, Inc.
P.O. Box 182604, Columbus, OH 43272
(800) 262-4729; fax (609) 308-4480
www.mcgraw-hill.com
Multi Media Market Research
MindBranch, Inc.
131 Ashland Street, North Adams, MA 01247
(800) 774-4410; fax (240) 747-3004
www.mindbranch.com
Orix USA
1717 Main Street, Suite 900, Dallas, TX 75201
(214) 237-2000; fax (214) 237-2018
www.orix.com
Project and Cost Engineer’s Handbook
Informaworld
270 Madison Avenue, New York, NY 10016
(212) 216-7800; fax (212) 564-7854
www.informaworld.com
Publication No. 946: How to Depreciate Property
IRS
10th St & Pennsylvania Ave, NW, Washington, DC 20004
800-829-4933
www.irs.gov
451
United Nation Statistics Division. Monthly Bulletin of Statistics Online.

New York: UN. http://unstats.un.org/unsd/mbs/app/DataSearchTable.aspx
United Nations, New York, NY, 10017
(212) 963-4664; fax (212) 963-0077)
www.un.org
U.S. Government Printing Office
866.512.1800; fax 202.512.2104
http://www.gpo.gov/
Audiovisual
Equipment Directory of Audio Visual Computer and Video Products
InfoComm International
11242 Waples Mill Road, Suite 200, Fairfax, VA 22031
(800) 659-7469; fax (703) 278-8082
www.infocomm.org
Professional Sound Blue Book
Video and TV Blue Book
Orion Research Corp.
14555 N. Scottsdale Road, Suite 330, Scottsdale, AZ 85254
(800) 844-0759; fax (480) 951-1117
www.usedprice.com
Automotive
2009 Official Commercial Truck Guide
2009 Official Used Car Guide
NADA Guides
(800) 966-6232
www.nadaguides.com
The Automobile Red Book
National Markets Reports’ Automobile Blue Book
The Older Automobile Red Book
Older Truck Blue Book
The Truck Blue Book
Truck Body Blue Book
Truck Identification
Primedia Business Magazines and Media, Inc.
9800 Metcalf Avenue, Overland Park, KS 66212
(800) 654-6776
www.pricedigests.com
452
Black Book
National Auto Research
A Hearst Business Media Company
2620 Barrett Road, P.O. Box 758, Gainesville, GA 30503-0758
(800) 554-1026
www.hearst.com
Bus Solutions
The Official Bus Book Market Report
Bus Book Publishing, Inc.
P.O. Box 635, McMinnville, OR 97128
(866) 378-7100; fax (503) 883-7100
www.busbook.com
Cars of Particular Interest
National Auto Research
A Hearst Business Media Company
2620 Barrett Road, P.O. Box 758, Gainesville, GA 30503-0758
(800) 554-1026
http://www.blackbookusa.com/cpi.asp
Kelley Blue Book Used Car Guide
Kelley Blue Book Co.
195 Technology, Irvine, CA 92618
(800) BLUE-BOOK
www.kbb.com
The Truck Gazette
P.O. Box 7767, Long Beach, CA 90807
(562) 254-3958; fax (562) 923-3997
www.thetruckgazette.com
Truck Paper
P.O. Box 85010, Lincoln, NE 68501-5673
(800) 247-4868; fax (402) 479-2134
www.truckpaper.com
Aviation
Aircraft Bluebook—Price Digest
(800) 654-6776
453
Aircraft Owners & Pilots Association (AOPA)

421 Aviation Way, Frederick, Maryland 21701
(301) 695-2000
www.aopa.org
Aircraft Shopper Online
44 Apple Street, Suite 5, Tinton Falls, NJ 07724
(888) 992-9276; fax (888) 994-9276
www.aso.com
Aircraft Value News
Phillips Business Information, Inc.
1201 Seven Locks Road, Suite 300, Potomac, MD 20854
http://www.aviationtoday.com/avn/
AMSTAT Corporation
44 Apple Street, Tinton Falls, NJ 07724
www.amstatcorp.com
Aviation International News
P.O. Box 277
214 Franklin Ave., Midland Park, NJ 07432
(201) 444-5075; fax (201) 444-4647
www.ainonline.com
Aviation Week & Space Technology
Aviation Week
1200 G Street, Suite 922, Washington D.C. 20005
http://www.aviationweek.com/aw
Avionics News Magazine
Aircraft Electronics Association
3570 NE Ralph Powell Road, Lee’s Summit, MO 64064
(816) 347-8400; fax (816) 347-8405
www.aea.net
Embry-Riddle Aeronautical University—Worldwide
600 S. Clyde Morris Boulevard, Daytona Beach, FL 32114-3900
(386) 226-6000
www.erau.edu
Experimental Aircraft Association
3000 Poberezny Rd, Oshkosh, WI 54902
(920) 426-4800; fax (920) 426-6761
www.eaa.org
454
National Business Aviation Association

1200 18th Street NW, Suite 400, Washington, DC 20036
(202) 783-9000; fax (202) 331-8364
www.nbaa.org
The Official Helicopter Bluebook
HeliValue$, Inc.
P.O. Box 575, Wauconda, IL 60084-0575
(847) 487-8258; fax (847) 487-0206
www.helivalues.com
Vref
Vref Publishing Inc.
Box 4300, Cottonwood, AZ 86326
(928) 634-5384; fax (928) 634-6453
www.vrefpub.com
World Aerospace Database
McGraw Hill Companies
Box 182604, Columbus, Ohio 43272
(877) 833-5524
http://www.mcgrawhill.com/
Audio, Broadcast and Telecommunications

American Teleprocessing Corporation
10681 Haddington Drive, Houston, TX 77043
(800) 669-3158; fax (713) 973-8321
Audio Equipment Blue Book
Orion Blue Book
(800) 844-0759; fax (480) 951-1117
www.usedprice.com
Broadcast Exchange
4043 Sepulveda Boulevard, Culver City, CA 90230
(310) 398-0802; fax (310) 398-0902
www.broadcastexchange.com
Satellite/Telecommunications Market Research
MindBranch, Inc.
(800) 774-4410; fax (240) 747-3004
www.mindbranch.com
455
Telecom Gear Online

P.O. Box 451449, Garland, TX 75045
(800) 964-4327
www.telecomgearonline.com
Telecom Manager
Story Communications
1801 Lakeshore Road West, Suite 113, Mississauga, Ontario L5J1J6
(905) 855-9348; fax (905) 855-9686
www.storycommunications.com
Computers and Information Technology

American Computer Exchange
World’s Fair Drive, Somerset, NJ 07083
(800) 644-3028; fax (908) 964-9846
www.americancomputerexchange.com
Blue Book—Copier, Computer, Fax, etc.
Asay Media Network
P.O. Box 670, 420 N. Range Line Road, Suite 19, Joplin, MO 64802-0670
(800) 825-9633; fax (417) 781-0427
www.asaypub.com
Compu-Mart
(905) 855-9348; fax (905) 855-9686
Computer Trading Post
1500 N. Northwest Highway, Suite 300, Park Ridge, IL 60068
(877) 384-9422; fax (847) 298-9239
http://computertradingpost.com
Cutter Networks
P.O. Box 8022, Madeira Beach, FL 33738-8022
(727) 398-5252; fax (727) 397-9610
www.bestdatasource.com
End User Market Value Report
DMC Consulting Group
P.O. Box 523536, Springfield, VA 22152
(888) 368-5210
www.dmcco.com
456
ITParade.com, Inc.
P.O. Box 4155, Cary, NC 27519-4155
(252) 257-3722; fax (252) 257-3904
www.itparade.com
IT Sourcebook
Computer Economics
2082 Business Center Drive, Suite 240, Irvine, CA 92612
(949) 831-8700; fax (949) 442-7688
www.computereconomics.com
Orion Blue Book
Orion Blue Book of Computers
Orion Research Corp.
(800) 844-0759; fax (480) 951-1117
www.usedprice.com
Processor
131 W. Grand Drive, Lincoln, NE 68521
(800) 247-4880; fax (402) 479-2120
www.processor.com
TPX Sourcebook
TPX
3083 Greenbrook Way NE, Atlanta, GA 30345-3716
(888) 746-4186
Construction
Building and Construction Costs
Marshall and Swift LLC
350 S. Grand Ave., 34th Floor, Los Angeles, CA 90071
(800) 544-2678; fax (213) 683-9043\
www.marshallswift.com
Building Construction Cost Data
Reed Construction Data
R.S. Means
63 Smiths Lane, P.O. Box 800, Kingston, MA 02364-9988
(800) 334-3509; fax (800) 632-6732
www.rsmeans.com
Construction Cost Analysis and Estimating
Pearson Education
One Lake Street, Upper Saddle River, NJ 07458
(201) 236-7000
www.pearsoned.com
457
Construction Equipment Advertiser

McCollister Publications
(562) 595-5731; fax (562) 424-1563
www.macpub.com
Contractors Hot Line
Heartland Communications, Inc.
(800) 247-2000; fax (515) 955-6636
www.contractorshotline.com
Cost Estimating Manual for Pipelines and Marine Structures
Estimator’s Electrical Man-Hour Manual
Estimator’s Equipment Installation Man-Hour Manual
Estimator’s General Construction Man-Hour Manual
Estimator’s Man-Hour Manual on Heating, Air Conditioning, Ventilating,
and Plumbing
Estimator’s Piping Man-Hour Manual
John S. Page Gulf Publishing Company
1977 2 Greenway Plaza, Suite 1020, Houston, TX 77046
(713) 529-4301; fax (713) 520-4433
www.gulfpub.com
Dodge Manual for Building Construction Pricing and Scheduling
Rule-of-Thumb Cost Estimating for Building Mechanical Systems: Accurate
Estimating and Budgeting Using Unit Assembly Costs
McGraw-Hill
(800) 262-4729; fax (609) 308-4480
www.mcgraw-hill.com
National Mechanical Estimator
Informaworld
270 Madison Ave, New York, NY 10016
(212) 696-9000; fax (212) 685-4540
www.informaworld.com
Richardson Cost Estimating Price Guide
Aspen Technology, Inc.
200 Wheeler Road, Burlington, MA 01803
(781) 221-6400; fax (781) 221-6410
www.aspentech.com
458
Energy
Energy Market Research
MindBranch, Inc.
(800) 774-4410; fax (240) 747-3004
www.mindbranch.com
PETEX Catalog
University of Texas at Austin Petroleum Extension Service
1 University Station, R8100, Austin TX 78712-1100
(800) 687-4132; fax (800) 687-7839
www.utexas.edu/cee/petex
Tradequip International
174 Fourth Street, Crossville, TN 38555
(800) 251.6776; fax (800) 423.9030
www.tradequip.com
Engineering
Association for the Advancement of Cost Engineering
209 Prairie Avenue, Suite 100, Morgantown, WV 26501-5934
(304) 296-8444; fax (304) 291-5728
www.aacei.org
Courtland A. Collier and Charles R. Glagola. Engineering Economic and
Cost Analysis. 3rd ed. Upper Saddle River, NJ: Prentice Hall, 1998.
Electronic Design’s Gold Book. University of Michigan: Hayben Pub Co,
1987.
Eugene L. Grant, W. Grant Ireson, and Richard S. Leavenworth. Principles
of Engineering Economy. 8th ed. Hoboken, NJ: John Wiley & Sons, Inc.,
1990.
Kenneth K. Humphreys. Jelen’s Cost and Optimization Engineering. 3rd ed.
Columbus, OH: McGraw Hill Companies, Inc., 1991.
Hans J. Lang and Donald N. Merino. Selection Process for Capital Projects.
Hoboken, NJ: John Wiley & Sons, Inc., 1993.
Phillip A. Laplante. Comprehensive Dictionary of Electrical Engineering.
2nd ed. Washington, DC: IEEE-USA, 2005.
Anson Marston, Robley Winfrey, and Jean C. Hempstead. Engineering
Valuation and Depreciation. Ames, IA: Iowa State University Press, 1975.
G.H.F. Nayler. Dictionary of Mechanical Engineering. Warrendale, PA:
SAE International, 1996.
459
Chan S. Park. Contemporary Engineering Economics. Upper Saddle River,

NJ: Prentice Hall, 2001.
Chan S. Park and Hunter P. Sharp. Advanced Engineering Economics.
Gerald W. Smith. Engineering Economy: Analysis of Capital Expenditures.
Ames, IA: Iowa State University Press, 1987.
William G. Sullivan, Elin M. Wicks, and James Luxhoj. Engineering
Economy. 12th ed. Upper Saddle River, NJ: Prentice Hall, 2002.
John A. White, Kenneth E. Case, David B. Pratt, and Marvin H. Agee. Principles
of Engineering Economic Analysis. 4th ed. Hoboken, NJ: John Wiley &
Sons, Inc., 1997.
Environmental
ESRI
380 New York Street, Redlands, CA 92373-8100
(909) 793-2853; fax (909) 307-3025
www.esri.com
Healthcare
Advanced Medical Technology Association
701 Pennsylvania Ave., NW, Suite 800, Washington, D.C. 20004-2654
(202) 783-8700; fax (202) 783-8750
www.advamed.org
Medical Dealer
MD Publishing
18 Eastbrook Bend, Peachtree City, GA 30269
(800) 906-3373; fax (770) 632-9090
www.mdpublishing.com
Medical Equipment Locator
Fastline Publications
P.O. Box 248, Buckner, KY 40010
(800) 239-8968; fax (502) 222-9403
www.melocator.com
The Medical Remarketer
Ledgewood Publications
P.O. Box 505, Canton, CT 06019-0505
(800) 251-4015; fax (860) 693-8115
460
Medical Market Research

Pharmaceutical Market Research
MindBranch, Inc.
(800) 774-4410; fax (240) 747-3004
www.mindbranch.com
Mednet Locator, Inc.
P.O. Box 30517, Memphis, TN 38130
(901) 754-2713
www.mednetlocator.com
Production Engineering—Medical Equipment Division
6035 East 38th Avenue, Denver, CO 80207
(303) 393-7800; fax (303) 393-1482
www.pemed.com
Used Medical Equipment Exchange Service
55 Northfield Drive, E., Suite 191, Waterloo, Ontario, Canada NZK3t6
www.DrUsed.com
Lending
Affiliated ReMarketing
Asset Remarketing Corporation
ITParade.com, Inc.
124 Quade Drive, Cary, NC 27513
(919) 388-9993; fax (919) 388-9992
www.remarketing.com
American Bankruptcy Institute
44 Canal Center Plaza, Suite 404, Alexandria, VA 22314
(703) 739-0800; fax (703) 739-1060
Beach Financial Corporation
701 Enterprise Road East, Suite 410, Saftey Harbor, FL 34695
(727) 725-2500; fax (727) 725-4506
www.beachfinancial.com
The Complete Guide to Leasing
The Red Book of Leasing
Bank of America, Leasing Marketing & Origination
www.bankofamerica.com
Equipment Leasing and Finance Association
1825 K Street NW, Suite 900, Washington, DC 20006
(202) 238-3400; fax (202) 238-3401
www.elfaonline.org
461
Lawrence C. Hackamack. Making Equipment Replacement Decisions. New

York, NY: American Management Association, 1969.

The AED Green Book
Custom Cost Evaluator
Lift Truck Serial Number Guide
Serial Number Guide
(800) 654-6776
American Hotel Register Company
100 South Milwaukee Avenue, Vernon Hills, IL 60061-4035
(800) 693-2030; fax (800) 688-9108
www.americanhotel.com
Associated Equipment Distributors, Inc.
615 West 22nd Street, Oak Brook, IL 60523
(800) 388-0650; fax (630) 574-0132
www.aednet.org
Association of Equipment Manufacturers
6737 Washington St., Suite 2400, Milwaukee, WI 53214-5647
(414) 272-0943; fax (414) 272-1170
www.aem.org
Attachment Connection
Contractors Hotline
Crane Guide
Hotline Parts Connection
Industrial Machine Trader’s Fabricator’s Hotline
Industrial Machine Trader Manufacturer’s Showcase
Manufacturers Showcase
Outdoor Power Guide
Tooling and Parts Connection
(800) 247-2000; fax (515) 955-6636
www.contractorshotline.com
462
Beverage Market Research

Fabrication Market Research
Subassemblies Market Research
MindBranch, Inc.
(800) 774-4410; fax (240) 747-3004
www.mindbranch.com
Bid Service—Semiconductor Equipment
Bid Service, LLC
225 Willow Brook Road, Freehold, NJ 07728
(732) 863-9500; fax (732) 863-1255
Blue Book of Current Market Prices of Used Heavy Construction Equipment
Ritchie Bros Auctioneers
3901 Faulkner Drive, Lincoln, NE 68506
(800) 428-9264; fax (402) 421-1738
www.rbauction.com
The Book (Used Machinery Pricing Guide, Auction)
New Machinery Pricing Guide with Projected Residual Values
L&M Publications, Inc.
P.O. Box 3273, Gainesville, GA 30501
(770) 532-5610; fax (770) 532-5667
www.thebooklm.com
Camera Traders Ltd.
33 W. 71st Street, New York, NY 10023-4136
(212) 463-0097
C. H. Chilton. Cost Engineering and the Process Industries. Columbus,
OH: McGraw-Hill, Inc. 1960.
Forrest D. Clark, A. B. Lorenzoni, and Michael Jimenez. Applied Cost
Engineering. 3rd ed. New York: Taylor & Francis. 1996.
The Classified Exchange—Woodworking Industry
Miller Publishing Corporation
1235 Sycamore View Road, Memphis, TN 38134
(800) 844-1280; fax (901) 373-6180
http://www.millerpublishing.com/ClassifiedExchange.asp
Classified Flea Market
3850 San Pablo Ave., Suite 102, Emeryville, CA 94608
(510) 420-1972
www.cfm.com
463
Contractors Equipment Guide

50 Central Avenue, Needham Heights, MA 02494-2914
(800) 225-8448; fax (781) 449-7768
Equip-Mart
(905) 855-9348; fax (905) 855-9686
http://www.storycommunications.com/main1.html
Equipment Journal
Pace Publishing, Ltd.
5160 Explorer Drive, Unit #6, Mississauga Ontario, L4W 4T7 Canada
(800) 667-8541; fax (905) 629-7988
www.equipmentjournal.com
Equipment Today
Cygnus Business Media
1233 Janesville Ave., Fort Atkinson, WI 53538-0803
(800) 547-7377
www.equipmenttoday.com
EquipmentWatch
Rental Rate Blue Book
Penton Media, Inc.
1735 Technology Drive, Suite 410, San Jose, CA 95110-1333
(800) 669-3282
www.equipmentwatch.com
Equipment World Magazine
Top Bid Equipment World Magazine
Randall-Reilly Publishing
3200 Rice Mine Road, NE, Tuscaloosa, AL 35406
(800) 633-5953
www.equipmentworld.com
Ex Factory, Inc.
1805 Sardis Road North, Charlotte, NC 28270
(704) 841-2001; fax (704) 841-1200
www.exfactory.com
Fabricators and Manufacturers Association International
833 Featherstone Road, Rockford, IL 61107
(888) 394-4362; fax (815) 484-7701
www.fmanet.org
464
Food Processing Machinery Association

1451 Dolley Madison Blvd., Suite 101, McLean, VA 22101
(703) 761-2600; fax (703) 548-6563
www.fpmsa.org
Foodservice Equipment Distributors Association
223 W. Jackson Boulevard, Suite 620, Chicago, IL 60606
(224) 293-6500
www.feda.com
Glass’s Information Services
48 La Trobe Street, Melbourne, VIC, 3000, Australia
61-3-9663-3009; fax 03-9663-3049
www.glassguide.com.au
Green Guide Equipment Values
Equipment Watch
1735 Technology Drive, Suite 410, San Jose, CA 95110-1313
(800) 669-3282; (408) 467-6700
www.equipmentwatch.com
Industrial Machinery Digest
262 Yeager Parkway, Suite C, Pelham, AL 35124
(866) 833-5346; fax (866) 826-5918
www.indmacdig.com
Industrial Market Place
7842 Lincoln Avenue, Skokie, IL 60077
(800) 323-1818; fax (708) 676-0063
www.industrialmktpl.com
LabTrader
1396 Poinsettia Avenue, Vista, CA 92081
(888) LabTrader; fax (760) 560-0020
www.labtrader.com
Last Bid Auction Results Guide
McGraw-Hill Encyclopedia of Science & Technology
McGraw-Hill
(800) 262-4729
www.mcgraw-hill.com
465
Lift Truck Guru

Crist Information and Research, LLC
P.O. Box 580910, Elk Grove, CA 95758
(800) 300-8890; fax (916) 244-0440
www.ltguru.com
Locator of Used Machinery, Equipment and Plant Services
Locator Services, Inc.
315 S. Patrick Street, Alexandria, VA 22314-3501
(703) 836-9700; fax (703) 836-7665
www.locatoronline.com
Locator Magazine—Office Machines
Asay Media Network
P.O. Box 670, Joplin, MO 64802
(800) 825-9633
www.asaypub.com
Machine Tools
8671 FM 2710, Lindale, TX 75771
(903) 882-9622; fax (903) 882-9919
www.machtools.com
Machinery Journal
McCollister Publications
(562) 595-5731; fax (562) 424-1563
www.macpub.com
Machinery Trader
P.O. Box 85670, Lincoln, NE 68501-5670
(800) 247-4898; fax (402) 479-2184
www.machinerytrader.com
The Mart
(905) 855-9348; fax (905) 855-9686
www.telecom-mart.com
MetricTest
3486 Investment Boulevard, Hayward, CA 94545
(800) 417-4370; fax (510) 264-0886
www.metrictest.com
466
My Little Salesman Heavy Equipment Catalog

2895 Chad Drive, Eugene, OR 97408
(800) 493-2295; fax (541) 342-3307
www.mlsinc.com
North American Association of Food Equipment Manufacturers
161 N. Clark Street, Suite 2020, Chicago, IL 60601
(312) 821-0201; fax (312) 821-0202
www.nafem.org
Official Guides
Iron Solutions, LLC
1195 Smizer Mill Road, Fenton, MO 63026
(877) 266-4766; fax (800) 821-7270
www.ironsolutions.com
Pennwell Publishing Company
1421 S. Sheridan Road, Tulsa OK 74112
(918) 835-3161
www.pennwell.com
Plastics Hotline
Industry Marketing Solutions
800 Central Avenue, 2nd Floor, Fort Dodge, IA 50501
(888) 247-2006
www.plasticshotline.com
Precision Metalforming Association
6363 Oak Tree Boulevard, Independence, OH 44131-2500
(216) 901-8800; fax (216) 901-9190
www.metalforming.com
Office of Price Administration. Prices of new machine tools, as of March
1, 1941 (revised). Washington, DC: Office of Price Administration, 1941.
http://www.archives.gov/research/guide-fed-records/groups/188.html
(accessed 29 November 2009).
Semiconductor Equipment and Materials International
19805 Hamilton Ave., Torrance, CA 90502
(650) 964-5111; fax (650) 940-5375
www.techexpo.com
Spectra
4420 East Miraloma Avenue, Suite M, Anaheim, CA 92807
(800) 745-1233; fax (714) 970-7095
www.spectra911.com
467
Supply Post
Post Publishers Ltd.
#105 - 26730 56th Avenue, Langley, BC V4W 3X5, Canada
(800) 663-4802; (604) 607-5577; fax (604) 607-0533
www.supplypost.com
Surplus Record Machinery and Equipment Directory
Ariba Company
20 North Wacker Drive, Suite 2400, Chicago, IL 60606-9757
(800) 622-5449; fax (312) 372-6537
www.surplusrecord.com
The Test Equipment Depot
Fotronic Corporation
99 Washington Street, Melrose, MA 02176-6024
(800) 517-8431; fax (781) 665-0780
www.fotronic.com
Used Equipment Directory/Used Equipment Network
45 Eisenhower Drive, 5th Floor, Paramus, NJ 07652
(973) 625-9292; fax (973) 625-8933
www.usedequip.com
Maritime
ABOS Marine Blue Book, Vols. I and II
(800) 654-6776
Boats and Harbors
P.O. Drawer 647, Crossville, TN 38557
(931) 484-6100; fax (931) 456-2337
www.boats-and-harbors.com
BUC Research (Used Boat Price Guides)
BUC International Corporation
1314 N.E. 17 Court, Fort Lauderdale, FL 33305
(800) 327-6929; fax (954) 561-3095
www.buc.com
William D. Eglinton. Marine Engine Room Blue Book. 3rd ed. Centreville,
MD: Cornell Maritime Press/Tidewater Publishers, 1984.
468
Marine Equipment Catalog

Marine Link
118 East 25th Street, New York, NY 10010
(212) 477-6700
www.marinelink.com
Marine Market Research
MindBranch, Inc.
(800) 774-4410; fax (240) 747-3004
www.mindbranch.com
NADA Marine Appraisal Guide
NADA Guides
(800) 966-6232
www.nadaguides.com
Mining
Mine and Mill Equipment and Supplies 1991: An Estimator’s Guide to Costs
Western Mine Engineering, Inc.
1120 N. Mullan Road, Suite 100, Spokane Valley, WA 99206
(509) 328-8023; fax (509) 328-2028
www.infomine.com
Mine and Quarry Trader
Penton Business Media, Inc.
P.O. Box 603, Indianapolis, IN 46206
(800) 827-7468; fax (913) 514-6545
www.mineandquarry.com
National Mining Association
101 Constitution Avenue, NW, Suite 500 East, Washington, DC 20001-2133
(202) 463-2600; fax (202) 463-2666
www.nma.org
Rock and Dirt
TAP Publishing Company
174 Fourth Street, P.O. Box 489, Crossville, TN 38557
(800) 251-6776; fax (800) 423-9030
www.rockanddirt.com
469
Miscellaneous
Surplus Governmental Sales
Defense Reutilization and Marketing Service
Hart Dole Inouye Federal Center
74 Washington Avenue North, Battle Creek, MI 49017-3092
(877) 352-2255
www.drms.dla.mil
Thomas Register of American Manufacturers
Thomas Publishing Company, LLC
5 Penn Plaza, New York, NY 10001
(212) 290-7277; fax (212) 290-7362
www.thomaspublishing.com
Oil and Gas

Oil and Gas Journal
Pennwell Publishing Company
1421 S. Sheridan Road, Tulsa OK 74112
(918) 835-3161
www.pennwell.com
Printing
Printing Equipment World Wide Network
N Shaw Associates Box 6150, Navarre, FL 32566
(888) 400-1485
www.printequip.com
Print-Mart
(905) 855-9348; fax (905) 855-9686
Used Graphic Arts & Printing Guide
L & M Publications, Inc.
(770) 532-5610; fax (770) 532-5667
www.thebooklm.com
470
Appendix H
Recommended Readings
Many of the following are available through public libraries or at a reasonable cost
from the publishers.
Accounting
Jack Fox. Starting and Building Your Own Accounting Business. New York: Wiley,
2000.
Agriculture
Agri Finance
6201 Howard Street, Niles, IL 60714
AgriMarketing
Henderson Communications LLC
11701 Borman Drive, Suite 300, St. Louis, MO 63146-4193
(314) 569-2700; fax (314) 569-1083
www.agrimarketing.com
Agri Marketing
National Agri Marketing Association
11020 King Street, Suite 205, Overland Park, KS 66210
(913) 491-6500; fax (913) 491-6502
www.nama.org
The Business Farmer
Newsmedia Corporation Publisher
22 W. 17th Street, Scottsbluff, NE 69361-3163
(308) 635-3110; fax (308) 635-7435
www.thebusinessfarmer.com
Dairy Field Magazine
Stagnito Communications, Inc.
155 Pfingsten Road, Suite 205, Deerfield, IL 60015
(847) 405-4009; fax (847) 763-9538
www.dairyfoods.com
Progressive Farmer Magazine
DTN
2204 Lakeshore Drive, Suite 415, Birmingham, AL 35209-6721
(800) 357-4466
www.progressivefarmer.com
471
Southern States Cooperative, Inc.

6606 W. Broad Street, Richmond, VA 23230-1717
(804) 281-1000; fax (804) 281-1413
www.southernstates.com
Appraisal
Jay Abrams. How to Value Your Business and Increase Its Potential.
Columbus, OH: McGraw-Hill, 2003.
American Society of Appraisers. Monographs. Herndon, VA: American
Society of Appraisers, 1969.
The Appraisal Institute. Valuation Insights and Perspectives. Chicago, IL:
The Appraisal Institute, periodical.
Appraisal Standards Board. Uniform Standards of Professional Appraisal
Practice. Washington, DC: The Appraisal Foundation, 2010.
Henry Adams Babcock. Appraisal Principles and Procedures. Herndon,
VA: American Society of Appraisers, 1980.
Steven Babitsky, James J. Mangraviti, Jr., and Alex Babitsky. The A to Z
Guide to Expert Witnessing. Falmouth, MA: SEAK, Inc., 2006.
Matthew Bender. Parker’s Evidence Code of California. Los Angeles, CA:
Parker & Son Publications, Inc., 2006.
James C. Bonbright. The Valuation of Property. Vols. 1, 2, and 4. Reprint.
Buffalo, NY: William S. Hein & Co., 2007.
California State Board of Equalization. Assessor’s Handbook General
Appraisal Manual. Sacramento, CA: California State Board of Equalization,
1995.
www.boe.ca.gov/proptaxes/ahcont.htm (accessed 29 November 2009)
R. James Claus, Ph.D., Susan L. Claus, and Thomas A. Claus. The Value
of Signs: A Guide for Professionals. Herndon, VA: American Society of
Appraisers, 2002.
Alphonse J. Dell’Isola and Stephen J. Kirk. Life Cycle Cost Data. New
York: McGraw-Hill Book Company, 1983.
Depreciation Bibliography. Ames, IA: Iowa State University Research
Foundation, 1981.
Financial Data Finder. Columbus, OH: Ohio State University.
http://fisher.osu.edu/cgi-bin/DB_Search/db_search.cgi?setup_file=finance.
setup.cgi (accessed 29 November 2009)
472
Jay E. Fishman, Shannon P. Pratt, J. Clifford Griffith, D. Keith Wilson, and

Stanton L. Meltzer. Guide to Business Valuations. Herndon, VA: American
Society of Appraisers, 2009.
Eugene L. Grant and Paul T. Norton, Jr. Depreciation. Rev. ed. New York:
The Ronald Press Company, 1955.
International Association of Assessing Officers. Property Assessment
Valuation. 2nd ed. Kansas City, MO: International Association of Assessing
Officers, 1996.
International Valuation Standards Committee
12 Great George Street, London, UK SW1P 3AD
44-01442 879 306
www.ivsc.org
Irwin E. Johnson. Mini-Math for Appraisers. Chicago, IL: International
Association of Assessing Officers, 1972.
Journal of Property Economics
International Association of Assessing Officers
314 West 10th St. Kansas City, MO 64105-1616
(800) 616-4226; fax (816) 701-8149
www.iaao.org
Machinery and Technical Specialties Journal
555 Herndon Parkway, Suite 125, Herndon, VA 20170
(800) 272-8258; fax (703) 742-8471
www.appraisers.org
George D. McCarthy and Robert E. Healy. Valuing a Company: Practices
and Procedures. New York: The Ronald Press Co., 1971.
Z. Christopher Mercer. Valuing Enterprise and Shareholder Cash Flows:
The Integrated Theory of Business Valuation. Memphis, TN: Peabody
Publishing Company, 2004.
Raymond C. Miles. Basic Business Appraisal. Hoboken, NJ: John Wiley &
Sons, Inc., 1984.
Shannon P. Pratt and Roger J. Grabowski. Cost of Capital: Applications and
Examples. 3rd ed. Hoboken, NJ: Wiley, 2008.
Shannon P. Pratt and Alina V. Niculita. Valuing a Business, 5th Edition:
The Analysis and Appraisal of Closely Held Companies. Columbus, OH:
McGraw-Hill, 2007.
Mark C. Tibergien and Owen Dahl. How to Value, Buy, or Sell a Financial
Advisory Practice. New York: Bloomberg Press, 2006.
473
Audiovisual
Video Systems Magazine
Primedia Business Management & Media
9800 Metcalf, Overland Park, KS 66212-2216
(818) 236-3667
www.videosystems.com
Automotive
Black Book
Hearst Business Media
(770) 532-4111 or (800) 554-1026
www.blackbookusa.com
Electric and Hybrid Vehicle Technology International
UKIP Media and Events
Abinger House, Church Street, Dorking, Surrey, UK RH4 1DF
44-1306-743744; fax 44-1306-887546
www.ukintpress.com
NADA Guides
(800) 966-6232
www.nadaguides.com
Aviation
Airline Business
Reed Business Information
360 Park Avenue South, New York, NY 10010
(646) 746-6400
www.reedbusiness.com
Airline Business Report (formerly Airline Financial News)
Chiltern Magazine Services, Ltd.
P&A House, Alma Road, Chesham, Bucks, UK HP5 3HB
44-0-1494-77-1930; (508) 861-0401 (US)
www.researchandmarkets.com
Aviation Week
Aviation Week and Space Technology Source Book
Aviation Week Intelligence Network
The Weekly of Business Aviation
The McGraw-Hill Companies, Inc.
1200 G Street, Suite 922, Washington, DC 20005
(877) 833-5224; fax (614) 759-3749
www.aviationweek.com
474
Aviator’s Hotline
1003 Central Avenue, PO Box 958, Fort Dodge, IA 50501
(800) 247-2000
www.aviatorshotline.com
Avionics News
Aircraft Electronics Association
3570 NE Ralph Powell Road, Lee’s Summit, MO 64064
(816) 347-8400; fax (816) 347-8405
www.aea.net
Avmark Newsletter
Avmark, Inc.
415 Church Street NE, Suite 203, Vienna, VA 22180
(703) 528-5610; fax (703) 528-3689
www.avmarkinc.com
Cessna Citation Magazine
Cessna Aircraft Company
P.O. Box 7704, Wichita, KS 67277-7704
(800) 4CESSNA
www.cessna.com
Inflight Magazine
Regional Airline World
The Shephard Group
268 Bath Road, Slough, Berkshire, UK SL1 4DX
44-0-1753-727001; fax 44-0-1753-727002
www.shephard.co.uk
Jet Fuel Intelligence Magazine
Energy Intelligence Group, Inc.
5 East 37th Street, 5th Floor, New York, NY 10016-2807
(212) 532-1112; fax (212) 532-4479
www.piwpubs.com
Business
John R. Boatright. Ethics and the Conduct of Business. 4th ed. Upper Saddle
River, NJ: Prentice Hall, 2003.
Business Week
The McGraw-Hill Companies Inc.
P.O. Box 53235, Boulder, CO 80322-3235
(800) 635-1200; fax (303) 604-7644
www.businessweek.com
475
Chicago Tribune
435 N. Michigan Avenue, Chicago, IL 60611
(800) TRIBUNE
www.chicagotribune.com
Lorna M. Daniells. Business Information Sources. 3rd ed. Berkeley and Los
Angeles, CA: University of California Press, 1993.
Rebecca Goodell. Ethics in American Business: Policies, Programs, and
Perceptions. Arlington, VA: Ethics Resource Center, 1994.
San Francisco Chronicle
Hearst Communications, Inc.
901 Mission Street, San Francisco, CA 94103
(415) 777-1111; fax (415) 543-4816
www.sfchron.com
The Wall Street Journal
Dow Jones & Company, Inc.
200 Liberty Street, New York, NY 10281
(212) 416-2000
www.wsj.com
Communications
InfoComm International
11242 Waples Mill Road, Suite 200, Fairfax, VA 22030
(800) 659-7469; fax (703) 278-8082
www.infocomm.org
Construction
Air Conditioning and Refrigeration News
BNP Media
2401 W. Big Beaver Rd., Suite 700, Troy, MI 48084
(248) 362-3700; fax (248) 362-0317
www.achrnews.com
Herbert R. Waugh and Nelson L. Burbank. Handbook of Building Terms and
Definitions. New York: Simmons-Boardman Publishing Company, 1954.
Industrial Heating
BNP Media
Manor Oak One, Suite 450, 1910 Cochran Road, Pittsburgh, PA 15220
(412) 531-3370; fax (412) 531-3375
www.industrialheating.com
476
Underground Construction
Oildom Publishing Company of Texas, Inc.
1160 Dairy Ashford, Suite 610, Houston, TX 77079
(281) 558-6930; fax (281) 558-7029
www.undergroundconstructionmagazine.com/
Electronics
Terrell Craft and Wilford Summers, American Electrician’s Handbook. 14th
ed. New York: McGraw Hill Inc, 2002.
EE Times
United Business Media LLC
600 Harrison Street, 6th Floor
San Francisco, CA
(415) 947-6649; fax (415) 947-6601
www.eet.com
Electrical Contracting and Engineering News
3030 W. Salt Creek Lane, Suite 200, Arlington Heights, IL 60005
(847) 454-2700; fax (847) 454-2759
www.ecenmag.com
Electrical Products Contracting
(847) 454-2700; fax (847) 454-2759
www.ecpzone.com
Electronic Design
Penton Media, Inc.
45 Eisenhower Drive, Paramus, NJ 07652
(201) 845-2467
www.elecdesign.com
Electronic Design’s Gold Book. University of Michigan: Hayden Pub Co, 1987
Electronic Products
Hearst Business Media
50 Charles Lindbergh Boulevard, Suite 100, Uniondale, NY 11553
www2.electronicproducts.com
Laser Focus World
PennWell Corporation
1421 S. Sheridan Road, Tulsa, OK 74112
(603) 891-9320; fax (603) 891-0574
www.laserfocusworld.com
477
Sensors
Questex Media Group, Inc.
275 Grove Street, Suite 2-130, Newton, MA 02466
(617) 219-8300; fax (617) 219-8310
www.sensorsmag.com
Energy
Energy Compass
Energy Intelligence Briefing
(212) 532-1112; fax (212) 532-4479
www.piwpubs.com
Energy Markets
Hart Energy Publishing, L.P.
4545 Post Oak Place Drive, Suite 210, Houston, TX 77027
(713) 993-9320; fax (713) 840-8585
www.oilandgasinvestor.com
Inside Energy
Megawatt Daily
Power Markets Week
McGraw-Hill, Inc.
1200 G Street NW, Suite 1000, Washington, DC 20005
(202) 383-2240; fax (202) 383-2116
www.platts.com
Microwave Journal
Horizon House Publications, Inc.
685 Canton Street, Norwood, MA 02062
(781) 769-9750
www.mwjournal.com
Microwaves and RF
Penton Media, Inc.
(201) 845-2453; fax (201) 845-2494
www.mwrf.com
Power Engineering
1421 South Sheridan Road, Tulsa, OK 74112
(918) 835-3161; fax (918) 831-9834
www.power-eng.com
478
Public Utilities Fortnightly

Public Utilities Reports, Inc.
8229 Boone Blvd., Suite 400, Vienna, VA 22182-2623
(703) 847-7720, (800) 368-5001; fax (703) 847-0683
www.pur.com
Engineering
Courtland A. Collier and Charles R. Glagola. Engineering Economic and
Cost Analysis. 3rd ed. Upper Saddle River, NJ: Prentice Hall, 1998.
Evaluation Engineering
Nelson Publishing, Inc.
2500 Tamiami Trail North, Nokomis, FL 34275
(941) 996-9521; fax (941) 966-2590
www.evaluationengineering.com
Frank D. Graham. Audel’s Power Plant Engineer’s Guide. New York: Theo
Audel & Co., 1945.
Eugene L. Grant, W. Grant Ireson, and Richard S. Leavenworth, Principles
of Engineering Economy. 8th ed. Hoboken, NJ: John Wiley & Sons, Inc.,
1990.
Kenneth K. Humphreys. Basic Cost Engineering. 3rd rev. ed. New York:
Marcel Dekker, Inc., 1995.
Anson Marston, Robley Winfrey, and Jean C. Hempstead. Engineering
Valuation and Depreciation. Ames, IA: Iowa State Press, 1953.
Chan S. Park. Advanced Engineering Economics. 10th ed. Hoboken, NJ:
John Wiley & Sons, Inc., 1990.
Gerald W. Smith. Engineering Economy: Analysis of Capital Expenditures.
Ames, IA: Iowa State Press, 1973.
J. David Viale. Basics of Manufacturing: Fundamental Concepts for
Decision Makers. Mississauga, ONT: Crisp Learning, 1995.
John A. White. Principles of Engineering Economic Analysis. 4th ed.
O. T. Zimmerman and Irvin Lavine. Chemical Engineering Costs. Dover,
NH: Industrial Research Service, 1950.
479
Healthcare
AG Consultant
Meister Media Worldwide
37733 Euclid Ave., Willoughby, OH 44094-5992
(901) 756-8822
www.meistermedia.com
Clean Rooms
(847) 559-7500; fax (847) 291-4816
www.cleanrooms.com
OR Today
MD Publishing, Inc.
18 Eastbrook Bend, Peachtree City, GA 30269
(800) 906-3373; fax (770) 632-9090
www.mdpublishing.com
Lending
ABF Journal
Xander Media Group, Inc.
409 East Lancaster Avenue, Wayne, PA 19087-4202
(610) 293-1300; fax (610) 293-9903
www.abfjournal.com
Richard M. Contino. Legal and Financial Aspects of Equipment Leasing
Transactions. Englewood Cliffs, NJ: Prentice Hall, Inc., 1979.
Equipment Financing Journal
528 Richmond Avenue, Buffalo, NY 14222
(716) 885-0444; fax (716) 885-0454
www.bachelormedia.com
Equipment Leasing Today
Equipment Leasing and Finance Association
1825 K Street NW, Suite 900, Washington, DC 20006
(202) 238-3400; fax (202) 238-3401
www.elaonline.org
Benjamin Graham, David L. Dodd, and Charles Tatham, Jr. Security
Analysis—Principles and Techniques. 3rd ed. Columbus, OH: McGraw-Hill
Book Company, 2004.
480

American Printer
Penton Media, Inc.
330 N. Wabash, Suite 2300, Chicago, IL 60611
(312) 595-1080; fax (312) 840-8455
www.americanprinter.com
Candy Industry
BNP Media
155 Pfingsten Road Suite 205, Deerfield, IL 60015
(847) 205-5660; fax (847) 205-5680
www.candyindustry.com
Chem.Info
Advantage Business Media
100 Enterprise Drive, Suite 600, Box 912, Rockaway, NJ 07866-0912
(973) 920-7000
www.chem.info
Chemical Marketing Reporter
Reed Business Information, Inc.
360 Park Avenue South, New York, NY 10014
(646) 746-6400
www.reedbusiness.com
Chemical Processing
Putman Media
555 West Pierce Road, Suite 301, Itaska, IL 60143
(630) 467-1300; fax (630) 467-1109
www.chemicalprocessing.com
ControlGlobal.com
Putnam Media
555 W. Pierce Rd., Suite 301, Itasca, IL 60143
(630) 467-1300; fax (630) 467-1124
www.controlglobal.com
E. Paul Degarmo, J. T. Black, Ronald A. Kohser, and Wayne Anderson.
Materials and Processes in Manufacturing. 8th ed. New York: McMillan
Publishing Company, 1997.
Directory of Industry Data Sources. Pensacola, FL: Ballinger Publishing
Company, 1983.
481
Equipment Today
1233 Janesville, Fort Atkinson, WI 53538-0803
(920) 563-1677; fax (920) 328-9029
www.forconstructionpros.com
Douglas A. Fisher. The Epic of Steel. Cambridge, MA: Harper & Row, 1963.
Food Processing
Putman Media, Inc.
555 W. Pierce Road, Suite 301, Itasca, IL 60143
(630) 467-1300
www.foodprocessing.com
Food Processors Guide
Food Processing Machinery and Supplies Association
200 Daingerfield Road, Alexandria, VA 22314
(703) 684-1080
Foundry Management and Technology
Penton Media, Inc.
1300 E. 9th Street, Cleveland, OH 44114-1503
(216) 696-7000; fax (216) 696-7932
www.foundrymag.com
Instant and Small Commercial Printer
Innex Publishing Company
28100 North Ashley Circle, P.O. Box 7280, Libertyville, IL 60048
(847) 816-7900; fax (847) 247-8855
www.innespub.com
Laboratory Equipment
(973) 920-7051; fax (973) 920-7542
www.laboratoryequipment.com
Manfredi and Associates
20934 Lakeview Parkway, Mundelein, IL 60060
(847) 949-9080; fax (847) 959-9910
www.manfredi.com
Modern Material Handling
225 Wyman Street, Waltham, MA 02451
(781) 734-8000
www.mmh.com
482
National Fire Protection Association

1 Batterymarch Park, Quincy, MA 02169-7471
(800) 344-3555; fax (617) 770-0700
www.nfpa.org
New Equipment Digest
Penton Media, Inc.
1300 East 9th Street, Cleveland, OH 44114-1503
(216) 931-9269
www.newequipment.com
Paint and Coatings Industry
BNP Media
2401 W. Big Beaver Road, Suite 700, Troy, MI 48084-3333
(248) 244-6434; fax (248) 244-3915
www.pcimag.com
Pharmaceutical Processing
(973) 920-7000; fax (973) 920-7531
www.pharmpro.com
Pharmaceutical Technology
Advanstar Communications, Inc.
6200 Canoga Ave., 2nd Floor, Woodland Hills, CA 91367
(818) 593-5000; fax (818) 593-5020
www.advanstar.com
PM Engineer
BNP Media
1050 IL Route 83, Suite 200, Bensenville, IL 60106-1096
(630) 694-4007
www.pmengineer.com
Powder and Bulk Solids
Canon Communications LLC
100 Enterprise Drive, Suite 600, Box 912, Rockaway, NJ 07886
(973) 920-7000; fax (973) 920-7531
www.powderbulksolids.com
Power Equipment Trade
Hatton-Brown Publishers, Inc.
225 Hanrick Street, Montgomery, AL 36104
(334) 834-1170; fax (334) 834-4525
www.powerequipmenttrade.com
483
Pulp and Paper International

Pulp and Paper Group
Tissue World
The Paperloop Group
4 Alfred Circle, Bedford, MA 01730
(866) 271-8525; fax (818) 487-4550
www.paperloop.com
E.D. Redding. “An Approach to a Method of Evaluating Chemical Plants
and Refineries,” ASA Appraisal and Valuation Manual, Vol. 4. Herndon,
VA: American Society of Appraisers, 1959.
www.appraisers.org
Sound and Vibration
P.O. Box 40416, Bay Village, OH 44140
(440) 835-0101; fax (440) 835-9303
www.sandv.com
Spectroscopy
Advanstar Communications, Inc.
485 Route One South, Building F, Iselin, NJ 08830
(732) 596-0276; fax (732) 225-0211
www.spectroscopyonline.com
Standard Industrial Classifications Manual (SIC). Washington, DC: U.S.
Office of Management and Budget, 1987.
Test and Measurement World
225 Wyman Street, Waltham, MA 02454
(781) 734-8423; fax (781) 290-8423
www.tmworld.com
Tire Technology International
UKIP Media & Events, Ltd.
Abingerhouse, Church Street, Dorking, Surrey, UK RH4-1DF
44+0-1306-743744; fax 44+0-1306-742525
www.tiretechnologyinternational.com
The Tube and Pipe Journal
FMA Communications, Inc.
833 Featherstone Road, Rockford, IL 61107-6302
(815) 399-8700; fax (815) 484-7700
www.fma-communications.com
484
Vacuum and Coating

27 Walker Lane, Weston, CT 06883
(203) 454-5678; fax (203) 454-5810
www.vactechmag.com
Water and Wastes Digest
Scranton Gillette Communications
3030 W. Salt Creek Lane, Arlington Heights, IL 60005-5025
(847) 391-1000; fax (847) 390-0408
www.wwdmag.com
WaterWorld
1421 South Sheridan Road, Tulsa, OK 74112
(918) 835-3161
www.waterworld.com
Woodworking Machinery. San Jose, CA: Global Industry Analysts, Inc., 2004.
Maritime
ABS
16855 Northchase Drive, Houston, TX 77060
(281) 877-5800
www.eagle.org
American Boat and Yacht Council (ABYC)
613 Third Street, Suite 10, Annapolis, MD 21403
(410) 990-4460
www.abycinc.org
Boat and Motor Dealer
Preston Publications
6600 W. Touhy Avenue, Niles, IL 60714
(847) 647-2900
www.boatmotordealer.com
Boating
Bonnier Corp.
1633 Broadway, 41st Floor, New York, NY 10019
(212) 767-6000; fax (212) 767-4831
www.boatingmag.com
Boating Business
Metroland Media Group Ltd.
447 Speers Road, Suite 4, Oakville, Ontario, Canada L6K, 3S7
(905) 842-6591; fax (905) 842-6843
www.formulapublications.com
485
Boating Industry
Ehlert Publishing Group
6420 Sycamore Lane, Suite 100, Maple Grove, IL 55369
(800) 848-6247; fax (763) 383-4499
www.boating-industry.com
Boating World
Duncan McIntosh Company, Inc.
17782 Cowan, Suite A, Irvine, CA 92614
(949) 660-6150
www.boatingworldonline.com
BUC’s Used Boat Price Guides
BUC International Corporation
1314 Northeast 17th Court, Ft. Lauderdale, FL 33305
(800) 327-6929; fax (954) 561-3095
www.buc.com
Rene de Kerchove. International Marine Dictionary. New York: Van
Norstrand Reinhold Company, 1961.
Det Norske Veritas (DNV)
Veritasveien 1, N-1322 Hovik, Norway
47-67 57 99 00; fax 47-67 57 99 11
www.dnv.com
Germanischer Lloyd
Vorsetzen 35, 20459 Hamburg, Germany
49-40 36 14 90; fax 49-40 36 14 92 00
www.gl-group.com
Hrvatski Registar Brodova (Croatian Register of Shipping)
21000 Split, Marasoviceva 67, P.O.B. 187 Croatia
385-21 408 111; fax 385 21 358 159
www.crs.hr
Indian Register of Shipping
52A, Adi Shankaracharya Marg, Opp. Powai Lake, Powai Mumbai 400 072, India
91-22-2570 3627; fax 91-22-25703611
www.irclass.org
International Maritime Organization
4 Albert Embankment, London, UK SE1 7SR
44-0-20-7735-7611, fax 44-0-20-7587-3210
www.imo.org
486
Korea Register of Shipping

60 Sinseongno, 23-7 Jang-dong, Yuseong-gu, Daejeon, Republic of Korea, 305-343
82-42-869-9114
www.krs.co.kr
Marine Log
345 Hudson Street, New York, NY 10014
(212) 620-7200; fax (212) 633-1165
www.marinelog.com
Maritime Administration, U.S. Department of Transportation
West Building, 1200 New Jersey Ave. SE, Washington, D.C. 20590
(800) 996-2723
www.MarAd.dot.gov
Maritime Reporter and Engineering News
Maritime Activity Reports, Inc.
118 East 25th Street, 2nd Floor, New York, NY 10010
(212) 477-6700; fax (212) 254-6271
www.marinelink.com
Motor Boating
Bonnier Corporation
P.O. Box 420235, Palm Coast, FL 32142-0235
(800) 888-9123
www.motorboating.com
Nippon Kaiji Kyokai
4-7 Kioi-Cho, Chiyoda-Ku, Tokyo 102-8567, Japan
81-3-3230-1201
www.classnk.or.jp
Registro Italiano Navale
Via Corsica 12, 16128 Genova, Italy
39-010-53-851
www.rina.org
River Transport News
Criton Corporation
9500 Crosby Road, Suite 200, Silver Spring, MD 20910
(301) 879-0447
Russian Maritime Register of Shipping
191186 St. Petersburg, 8, Dvortsovaya Nab., Russian Federation
7-812-314-07-43
www.rs-head.spb.ru
487
Seatrade
Seatrade Communications Ltd.
Seatrade House, 42 North Station Road, Colchester, UK CO1 1RB
44 1206 545121; fax: +44 1206 545190
www.seatrade.com
US Sailing (formerly American Sailor)
15 Maritime Drive, P.O. Box 1260, Portsmouth, RI 02871-0907
(401) 683-0800; fax (401) 683-0840
www.ussailing.org
The Waterways Journal
Waterways Journal, Inc.
319 North 4th Street, Suite 650, St. Louis, MO 63102
(314) 241-7354; fax (314) 241-4207
www.waterwaysjournal.net
Workboat
Diversified Business Communications
121 Free Street, P.O. Box 7437, Portland, ME 04112-7437
(207) 842-5500; fax (207) 842-5503
www.workboat.com
Metalworking
Fabricating and Metalworking
33 Inverness Center Parkway, Birmingham, AL 35242
(800) 366-0676
www.fandmmag.com
Frank D. Graham. Audel’s Machinist and Tool Maker’s Handy Book. New
York: Theo Audel & Co., 1963.
Machinery Manuals Online
Machinery Support, Inc.
6425 Alondra Blvd., Paramount, CA 90723
(866) 626-8251; fax (562) 529.8982
www.machinerybrochures.com
Machinery Outlook
Manfredi & Associates
20934 Lakeview Parkway, Mundelein, IL 60060
(847) 949-9080; fax (847) 949-9910
www.machineryoutlook.com
Jones Oberg. Machinery’s Handbook. 28th ed. New York: Industrial Press, 2008.
488
Metal Forming Magazine

PMA Services, Inc.
6363 Oak Tree Blvd., Independence, OH 44131-2500
(216) 901-8800; fax (216) 901-9669
www.metalformingmagazine.com
Modern Applications News
Nelson Publishing, Inc.
2500 Tamiami Trail North, Nokomis, FL 34275-3482
(941) 966-9521; fax (941) 966-2590
www.nelsonpub.com
Practical Welding Today
FMA Communications
833 Featherstone Road, Rockford, IL 61107
(815) 399-8700; fax (815) 484-7700
www.thefabricator.com
Tooling and Production
Nelson Publishing
6001 Cochran Road, Suite 104, Solon, OH 44139
(440) 248-1125; fax (440) 248-0187
www.toolingandproduction.com
Welding Design and Fabrication
Penton Media, Inc.
1300 E. 9th Street, Cleveland, OH 44114
(216) 696-7000; fax (216) 696-1752
weldingmag.com
Mining
Coal Age
Mining Media Inc.
9550 Regency Square Boulevard, Suite 1108, Jacksonville, FL 32225
(904) 721-2925; fax (904) 721-2930
www.coalage.com
Coal Magazine
Mining Environmental Management
Mining Journal
Mining Magazine
Mining Communications, Ltd.
Groundfloor, Albert House 1 Singer Street, London, UK EC2A 4BQ
44-0-207-216-6060; fax 44-0-207-216-6050
www.mining-journal.com
489
U.S. Bureau of Mines, Department of the Interior

1849 C Street, N.W., Washington DC 20240
(202) 208-3100
www.doi.gov
Miscellaneous
Storm A. Allman. Environmental Impact Studies; Their Need and
Components. Marshall and Stevens, Inc., 1973
American Hotel Register Company
100 South Milwaukee Avenue, Vernon Hills, IL 60061-4035
(800) 693-2030; fax (800) 688-9108
www.americanhotel.com
Billian Publishing
2100 Powers Ferry Road SE, Suite 300, Atlanta, GA 30339-5014
(770) 955-5656; fax (770) 952-0669
www.billian.com
Clean Tech
Witter Publishing
20 Commerce Street, Flemington, NJ 08822
(908) 788-0343; fax (908) 788-8416
www.cleantechcentral.com
Library of Congress
101 Independence Avenue, SE, Washington, DC 20540
(202) 707-5000
www.loc.gov
Lloyd’s Register
71 Fenchurch Street, London, UK EC3M 4BS
44-(0)20-7709-9166
www.lr.org
NEFTE Compass
(212) 532-1112; fax (212) 532-4479
www.piwpubs.com
Occupational Safety & Health Administration
U.S. Department of Labor
200 Constitution Avenue, NW, Washington, DC 20210
(800) 321-6742
www.osha.gov
490
Ayn Rand and Leonard Peikoff. The Voice of Reason: Essays of Objectivist
Thought. New York: New American Library, 1990
Irene S. Rubin. Running In the Red: The Political Dynamics of Urban Fiscal
Stress. Albany, NY: State University of New York Press, 1982.
Thomas Register
Thomas Publishing Company, LLC
5 Penn Plaza, 12th Floor, New York, NY 10001
(212) 695-0500; fax (212) 290-7362
www.thomaspublishing.com
U.S. Government Printing Office
732 North Capitol Street, NW, Washington, DC 20401
www.gpoaccess.gov
Anthony C. Winkler and Jo Ray McCuen. Writing the Research Paper: A
Handbook. San Diego, CA: Harcourt Brace Jovanovich Publishers, 1985.
Oil and Gas

A & D Watch
Oil and Gas Finance Sourcebook
Oil and Gas Investor
1616 S. Voss Road, Suite 1000, Houston, TX 77057-2627
(713) 260-6400; fax (713) 840-8585
www.oilandgasinvestor.com
Ron Baker. A Primer of Oilwell Drilling. 6th ed. Houston, TX: Petroleum
Extension Service, 2000.
Gas Daily
McGraw-Hill Companies
1200 G Street NW, Suite 1000, Washington, DC 20005
(202) 383-2000; fax (202) 383-2125
www.platts.com
International Oil Daily
International Petroleum Finance
Natural Gas Week
The Oil Daily
Petroleum Intelligence Weekly
(212) 532-1112; fax (212) 532-4479
www.piwpubs.com
491
Natural Gas Fuels

RP Publishing
2696 S. Colorado Blvd, Suite 595, Denver, CO 80222
(303) 863-0521; fax (303) 863-1722
www.rppublishing.com
Oil and Gas Journal
(800) 331-4463
www.ogj.com
Petroleum Engineer International
1616 S. Voss Road, Suite 1000, Houston, TX 77057-2627
(713) 260-6400
Pipeline and Gas Journal
Oildom Publishing Company of Texas, Inc.
1160 Dairy Ashford Street, Suite 610, Houston, TX 770793014
(281) 558-6930; fax (281) 558-7029
www.pipelineandgasjournal.com
Pipeline Construction
A Primer of Offshore Operations
A Primer of Oilwell Service, Workover and Completion
Petroleum Extension Service, The University of Texas at Austin and The
Pipeline Contractors’ Association
5870 Hwy. 6 North, Suite 107, Houston, TX 77084
(281) 345-4040
www.rigzone.com
World Oil
Gulf Publishing Company
P.O. Box 2608, Houston, TX 77252-2608
(713) 529-4301; fax (713) 520-4433
www.worldoil.com
Railroad
Kenneth G. Ellsworth, ed. The Car & Locomotive Cyclopedia. New York:
Simmons Boardman Publishing Corp., 1980.
Classic Trains
Trains
Kalmbach Publishing Company
21027 Crossroads Circle, P.O. Box 1612, Waukesha, WI 53187-1612
(800) 533-6644, fax (262) 796-1615
www.trains.com
492
Field Manual of the AAR Interchange Rules. Washington, DC: Association

of American Railroads, 2009.
International Railway Journal
Simmons-Boardman Publishing Corp.
46 Killigrew Street, Falmouth, Cornwall, UK TR113PP
44-1326-313945, fax 44-1326-211576
www.railjournal.com
Robert G. Lewis. Railway Age’s Comprehensive Railroad Dictionary.
Omaha, NE: Simmons Boardman Books, Inc., 1984.
The Official Railway Equipment Register. University of Michigan: Railway
Equipment and Publication Co., 1961-1972
Progressive Railroading
Trade Press Media Group
2100 West Florist Avenue, Milwaukee, WI 53209
(561) 743-7373; fax (561) 743-1973
www.progressiverailroading.com
Railway Age
Simmons-Boardman Publishing Group
345 Hudson Street, 12th Floor, New York, NY 10014-4590
(212) 620-7244; fax (212) 633-1863
www.railwayage.com
Railway Track and Structures
Simmons-Boardman Publishing Group
222 S. Riverside Plaza, Suite 1870, Chicago, IL 60606
(312) 466-2413; fax (312) 466-0151
www.rtands.com
U.S. Rail News
Business Publishers, Inc.
P.O. Box 17592, Baltimore, MD 21297
(800) 274-6737; fax (301) 587-4530
www.bpinews.com
Rubber and Plastics

Robert O. Babbit, ed. The Vanderbilt Rubber Handbook. 12th ed. Norwalk,
CT: R.T. Vanderbilt Company, Inc., 1978.
British Plastics and Rubber Online
Plastics Multimedia Communications Ltd.
Chowley Court, Chowley Oak Lane, Tattenhall, Cheshire, UK CH3 9GA
44-0-1829-770037
www.britishplastics.co.uk
493
European Rubber Journal

Crain Communications, Ltd.
21st Thomas Street, London, UK SE19RY
44-0-20-7457-1400, fax 44-0-20-7457-1440
www.european-rubber-journal.com
Modern Plastics
McGraw-Hill Company
1221 Sixth Avenue, New York, NY 10020
(800) 243-9696
www.mcgraw-hill.com
Modern Plastics Encyclopedia. Raritan, NJ: McGraw Hill, 1991.
Modern Plastics Worldwide
Canon Communications, LLC
11444 W. Olympic Blvd., Suite 900, Los Angeles, CA 90064
(310) 445-4200
www.modplas.com
Plastics Machinery and Auxiliaries
Canon Communications LLC
3300 E. 1st Avenue, Suite 370, Denver, CO 80206
(303) 321-2322; fax (303) 321-3552
www.pma-magazine.com
Plastics News International
The Editors Desk Pty. Ltd.
163 City Road, Southbank, Victoria, Australia 3006
61-3-9775-2139, fax 61-3-9787-6105
www.plasticsnews.net
Plastics News
Crain Communications Inc.
1725 Merriam Road, Akron, OH 44313-5283
(800) 678-9595; fax (330) 446-6770
www.plasticsnews.com
RAPRA. Rubbicana Europe—The European Rubber and Polyurethane
Directory. Munich: Hanser Publishers, 2002.
Rubber and Plastic News
Crain Communications Inc.
1725 Merriman Road, Akron, OH 44313-5251
(330) 836-9180; fax (330) 836-1005
www.rubbernews.com
494
Technology
AccessScience: Encyclopedia of Science and Technology
McGraw-Hill Book Company
Box 666, Highstown, NY 08520
(888) 307-5984; (614) 759-3663 (outside the U.S.)
www.accessscience.com
Advanced Imaging
(847) 454-2759
www.cygnusb2b.com
Barry W. Bolhm and Tom DeMarco, Controlling Software Projects:
Management, Measurement, and Estimates. Upper Saddle River, NJ:
Prentice Hall PTR, 1986.
Cutting Technology
Penton Media, Inc.
249 W. 17th Street, New York, NY 10011
(212) 204-4200
www.penton.com
FedWorld.gov
U.S. Department of Commerce, National Technical Information Service
5285 Port Royal Road, Springfield, VA 22161
(703) 605-6000
www.fedworld.gov
Doann Houghton-Alico. Creating Computer Software User Guides. New
York: McGraw-Hill Book Company, 1985.
Sybil P. Parker. Dictionary of Scientific and Technical Terms. 6th ed.
Highstown, NY: McGraw-Hill Book Company, 2002.
Transportation
Commuter World
The Shephard Group
268 Bath Road, Slough, Berkshire, UK SL14DX
44-0-1628-60-4311
www.shephard.co.uk
495
Appendix I
Valuation Process For Financial
Reporting
Valuation Process:
Valuations under SFAS 141R, SFAS 142, and SFAS 157 (and their international
counterparts) are performed for financial reporting purposes and the most logical starting
point for the M&TS appraiser is typically the acquiree’s fixed asset records. The acquirer’s
ultimate goal is to have an updated fixed asset record that reflects the fair values of the
assets as of the acquisition date.
Beginning with the fixed asset records as the basis for the valuation has its limita-
tions and appropriate due diligence must be performed in order to perform an accurate and
credible valuation.
Fixed asset records may include some or all of the following issues:
• Partial or installment payments;
• Allocated values (or values other than historic cost);
• Allocated dates (or dates other than the date that the asset was originally put
into service for the first time);
• Assets purchased used;
• “Ghost assets” (i.e. assets which are no longer on site);
• Descriptions that are not easily identifiable or that are not complete;
• Asset entries which actually represent groups of assets;
• Misclassified assets (i.e. machinery or computers in the furniture category;
equipment in the building category, etc);
• Entries that are actually repairs, rebuilds, or additions to existing assets; and/
or
• Other concerns or issues.
This creates quite the quandary for the appraiser. The acquirer wants the data back
in a way that allows them to easily upload the information into their fixed asset software
and does not want to “start over”, but the appraiser needs to make sure the scope of work
(as defined in USPAP) is adequate to develop credible results as required by USPAP.
Because of these and similar issues, it is important that the M&TS appraiser review
the fixed asset records with the appropriate personnel in order to gain an understanding
of the various entries. In addition, the M&TS appraiser needs to assess the validity and
usefulness of the fixed asset records prior to using them as the basis for the valuation.
496
Valuation Process For Financial Reporting
The first step in the process is to properly establish the project parameters. As with
any project, specific questions have to be addressed.
The M&TS appraiser must address the following at a minimum:
• How many and which sites need to be visited?
• What is the inspection threshold (in terms of Historic Cost, Replacement Cost
New, etc)? In many cases, the threshold may correspond to the acquiree’s
capitalization level (the level at which an item gets added to the fixed asset
records as opposed to being expensed).
• How accurate are the fixed asset records (where should attention be focused)?
• How many days will be dedicated to inspections and analysis in order to pro-
duce credible results?
• What is the Project Timing?
• How are major assets found in the field inspections that are not on the asset
listing to be handled (if applicable)?
• How are “ghost assets” to be handled (if applicable)?
All of the questions listed above are geared towards assisting the M&TS appraiser
in establishing the appropriate scope of work as defined in USPAP.
In order to minimize the questions that may arise during a subsequent review or au-
dit, it is recommended that the project parameters be coordinated with the client’s auditor
at the beginning of the appraisal process. Under USPAP, it is the appraiser’s responsibility
to determine the scope of work required to produce credible and reliable results for the
client and any other intended users. However, in some cases, the client and/or the audit
team (which are typically the intended users of the appraisal) may have information that
will assist the appraiser in establishing the scope of work.
Previously Allocated Values:

Previous allocations and valuations present particular challenges to the appraiser,
especially when the derivation and reliability of the values cannot be tested or otherwise
gauged.
SFAS 141’s predecessor allowed for the “pooling” of assets under several different
methods when an acquisition took place. One method was the “allocation method” where
a valuation was performed and the values allocated similarly to the process performed
under SFAS 141R and SFAS 157. In many cases, this allocation was performed by ap-
praisers, but in other cases, it may have been performed internally. Other methods included
carrying over the acquiree’s assets at net book value or at historical cost to serve as the
basis for future depreciation. Any acquisition performed after the implementation of SFAS
141 cannot employ these methods, but data from previous mergers and allocation practices
are still present in many fixed asset records.
Some of the ways to identify potential asset allocations are that many assets have
the same in service date; all (or many) of the values are rounded, and/or several assets have
zero acquisition value.
Using allocated values as the basis for the cost approach is not acceptable appraisal
methodology and will not produce a credible appraisal. As such, if the M&TS appraiser
497
is confronted with allocated values, he/she will need to perform additional research and
analysis in order to perform a credible appraisal. This additional research and analysis may
change the scope of work required.
Allocated values can be handled by the appraiser using several methods which are
listed below in order of preference:
a. Gather electronic historical cost and date information for the allocated as-
sets. In many cases, clients maintain several different sets of data regard-
ing the assets listed in the fixed asset records. They may have maintained
historical cost and purchase date data in their tax books or other asset files.
b. Gather a hard of the copy historical cost and date information for the
allocated assets. If the allocation is recent and if the electronic data is no
longer available, the client may have retained hard copies of the data.
Comment: When using either of the methods listed above, it is im-
portant to be sure that there is some way (asset number, etc.) to tie the
Historic Data into the data in the existing fixed asset record.
c. Perform market research on all of the allocated assets. This is the most
reliable method but it may be time consuming if there are many allocated
assets.
d. Perform Replacement Cost New research on all of the allocated assets.
Once reliable Replacement Cost New values are obtained, the M&TS
appraiser should perform a valid cost approach as described elsewhere
in this text. This is a very reliable method, but, again can be very time
consuming if there are many allocated assets.
e. Segregate and handle the assets from the allocated years using a method
similar to the Aggregate Obsolescence Factor process described in the
Cost Approach Chapter (Chapter 3) or some other logical and supportable
methodology.
The following steps will detail the entire valuation process where the fixed asset
record is used as the starting point for the valuation.
Pre-Visit Stage:
Proper project arrangements and pre-inspection preparation will significantly re-
duce the number of issues that might arise during the valuation process and will allow the
appraiser to gather some helpful information as well as prepare the client.
Prior to the inspection, it is important to review the fixed asset record and list ques-
tions that can be answered by appropriate accounting and/or engineering personnel. At
this stage, assets to be verified and inspected as well as those assets that were purchased
used, lumped or grouped assets, etc., should be identified. These assets will take further
investigation and clarification.
It is also critical to know the run date of the fixed asset record. Is it concurrent with
the valuation date? If the asset record is not concurrent with the valuation date, adjust-
ments will have to be made in order to properly reflect the listing of owned assets as of
the valuation date. Adjustments may include removing assets which were purchased after
498
the valuation date, adding assets which were disposed after the valuation date, and other
adjustments.
Additional questions to consider while analyzing the asset record are:
1. Does the asset list contain department or asset tag numbers that might assist
in identifying those assets in the field?
2. Is the asset list for one location or several locations and, if it is for several
locations, is there a way to segregate the data into the various locations?
3. Are there data fields such as manufacturer, model and serial number that
might be hidden or truncated?
After reviewing the asset record, it is helpful to sort the assets in a manner that
would maximize the inspection efforts.
When choosing which assets to verify and inspect, consider the following:
1. The assets chosen should cover the major assets at the facility;
2. The assets chosen should allow the appraiser to identify those “major” as-
sets which have been retired or otherwise disposed (and assets that will be
disposed in the near future);
3. The assets chosen should allow the appraiser to identify major idle and sal-
vaged assets (and assets that will be idled or salvaged in the near future);
4. The assets chosen should include those assets which have allocated or costs
other than historical cost and for which historic information could not be
gathered (regardless of original cost); and
5. The assets chosen should include those assets which have been purchased
used (regardless of original cost).
In choosing which assets to verify and inspect, the appraiser is not necessarily per-
forming a statistical sampling, but rather, is choosing a sample of assets that will produce,
in the judgment of the M&TS appraiser, a credible result a outlined under the Scope of
Work Rule in USPAP.
When using a technique as indicated above, the M&TS appraiser is not inspecting
all of the assets. The appraiser must make specific assumptions regarding the assets that are
not inspected (e.g. existence, condition, etc.). These assumptions should be duly noted in
the appraiser’s work papers and in the report as required by USPAP.
A more detailed discussion of sampling in included in Chapter 2 (Classification and
Description of Machinery and Equipment).
It usually helps to create a separate work sheet identifying only those assets that
will be inspected. It is also a good idea to provide this listing to facility personnel in
advance of the site visit. This allows the personnel to be better prepared for the inspection
and to streamline the process.
Send out a questionnaire (if applicable). The questionnaire should request back-
ground information on the company, data to assist in the calculation of any potential func-
tional and/or economic obsolescence factors at the facility, any questions raised during the
initial asset record review, questions regarding whether or not various direct and indirect
499
costs (i.e. engineering, installation etc) are included in the historical cost data, and other
pertinent items.
It is also helpful to find out when the last time a physical asset inventory was per-
formed and if that inventory was reconciled to the fixed asset records. In addition, since
the field inspection may be up to a year after the valuation date (as allowed by SFAS 141R),
the questionnaire should contain questions regarding any changes in make up or condition
of the assets between the valuation date and the inspection date.
Field Inspection Stage:

This stage of the analysis should be performed just like any other appraisal assign-
ment. During this stage, the appraiser should:
a. Gather appropriate data on the sampled assets as discussed in Chapter
2 (Classification and Description of Machinery and Equipment) and as
taught in the various ASA courses ;
b. Gather information on rebuilds, upgrades etc. including how to tie these
entries into specific assets (as practical);
c. Gather the appropriate data required to perform the Cost Approach, Sales
Comparison Approach and the Income Approach (as applicable);
d. Gather data on assets which are grouped or lumped on the fixed asset
records;
e. Gather data on any assets which may have been disposed;
f. Identify assets which are idled, cannibalized, scheduled for disposal, etc;
g. Gather data on any differences in the asset record (or the assets inspected)
between the Valuation Date and the date of the inspection (as applicable);
h. Discuss disposition policies with accounting and production personnel
separately. Asking the same question of different people may result in
different answers and may lead to be further investigation; and
i. Gather all other data the appraiser deems necessary to perform a credible
appraisal.
Post Inspection Stage:

This stage of the analysis should be performed just like any other appraisal as-
signment. At this juncture, the appraiser is applying the various valuation techniques as
detailed in other chapters of this publication.
During this stage, the appraiser should:
a. Perform Cost, Sales Comparison, and Income Research (as applicable and
appropriate);
b. Perform the Cost, Sales Comparison, and Income Approaches for the as-
sets (as applicable and appropriate);
c. Calculate any applicable obsolescence factors (as appropriate); and
500
d. Prepare the final report and exhibits for the client as outlined in Chapter 6
(Report Writing).
It is recommended to utilize market derived data wherever possible and practical.
In addition to providing market indications of value, this research may also allow the ap-
praiser to quantify certain obsolescence factors. Also, under SFAS 157, market derived
data is considered an “observable input” and is preferred.
An aggregate obsolescence factor is a very useful tool for quantifying potentially
unrecognized obsolescence in those assets which were valued using the Cost Approach
or for creating credible results when using allocated or used costs (which is always a last
resort). The steps in calculating this aggregate obsolescence factor is discussed in detail in
Chapter 3 (the Cost Approach) of this text book.
Since the appraiser may be working with a wide variety of asset types and those
found in or used in distinct departments and processes, the M&TS appraiser will have
to develop multiple adjustment factors (i.e. Replacement Cost New adjustment factors,
obsolescence factors, etc. It is important that the appraiser know which assets (individually
or by class and/or areas) are affected by which adjustments. This is one area where the
cross referencing technique may be extremely useful. In the review process the appraiser
may be questioned regarding these adjustments, or lack of adjustments, to specific line
items or categories.
Reporting Stage:
After the analysis is completed, the appraiser needs to submit to the client (and
potentially to the client’s auditor) a report that meets the applicable financial reporting
standards (i.e. SFAS 141R, SFAS 144, SFAS 157) and USPAP. Included in the report
should be summaries by the client’s accounting classifications as well as detailed listings
of the assets (either in hard copy or in electronic format).
Clients often find it helpful if the M&TS appraiser is able to provide them with an
electronic copy of the final values in a format that will allow them to upload the informa-
tion into their fixed asset system. Although many fixed asset tracking systems can accept
uploads from spreadsheet and/or data base software, discussions with the client prior to
beginning the valuation project are helpful since the fixed asset tracking software package
can vary from the acquiree and the acquirer.
It is essential that the appraiser maintain all of the data and data fields originally
provided by the client at the beginning of the analysis. If certain data is excluded or other-
wise not utilized, the data should not be deleted from the analysis. In addition to the data
provided originally, the appraiser may include additional descriptive data on the verified
assets, additional comments, and the Fair Value assigned to each line item.
Most fixed asset tracking systems in use today offer the user multiple descriptive
fields which include tag number, manufacturer, model number, serial number, enhanced
descriptive data, etc. As such, the majority of the data gathered in the field would be use-
ful and meaningful to the client. It will also become helpful to the appraiser if the client
requests an additional appraisal or other services in the future.
501
Machinery and Technical
Specialties
Glossary of Terms
Abatement
Complete removal of an amount due, (usually referring to a tax abatement a penalty
abatement or an interest abatement within a governing agency). A lessening or reduction
of something.1
Accelerated Cost Recovery Schedule (ACRS)
That portion of the Internal Revenue Code that sets forth tax depreciation deductions.
Accelerated Depreciation
A method of calculating depreciation in such a way that the amount of depreciation
taken in each year is higher in the early years of an asset’s life contrasted with straight-line
depreciation where deductions are equal for each year of the life of the asset.
Account Payable
Amount owed to a creditor for delivered goods or completed services. 2
Account Receivable
Claim against a debtor for an uncollected amount, generally from a completed
transaction of sales or services rendered. 3
Accounting Cycle
Composed of several accounting periods spanning over twelve consecutive months.
Accounting Equation
The equation for financial statements that reads assets = liabilities + owner’s.
Accounts
Major groupings of assets that are similar in character.
Accounts Payable
The bills you owe to others for goods or services.
Accounts Receivable
The amounts owed to you by others.
Accrual basis
An accounting method where transactions are recorded as they occur regardless of
when payment is made or received.
502
Glossary of Terms
Accrued Depreciation
The total value loss from all causes, including value loss from physical deteriora-
tion, functional obsolescence, and economic (external) obsolescence.
Accumulated Depreciation (Book Depreciation)
An accounting term that represents the total depreciation taken against the cost of
an asset since it was acquired as of a given date, i.e., the running balance of the depreciation
taken on an asset.
Acquisition Date
The effective purchase date of an asset.
Actual Cash Value
In property and auto physical damage insurance, one of several possible methods
for establishing the value of insured property to calculate the premium and determine the
amount the insurer will pay in the event of a loss. Although the term is seldom defined in
the policy, the generally accepted insurance definition of actual cash value is the cost to
repair or replace the damaged property with materials of like kind and quality, less depre-
ciation of the damaged property. Courts have differed as to whether depreciation includes
economic obsolescence as well as actual physical depreciation. (Also see Insurable Value
Depreciated.) 4
Ad Valorem Tax
An ad valorem tax is a tax based on the value of real estate or personal property.
Adjusted Gross Income
Gross income reduced by business and other specified expenses of individual tax-
payers. 5
Advocacy
Representing the cause or interest of another, even if that cause or interest does not
necessarily coincide with one’s own beliefs, opinions, conclusions, or recommendations.
Aftermarket
The sale of something after it is originally placed on the market for sale.
Age
The period that reflects the elapsed time from the date of installation to the date of
observation of an asset.
Age/Life Analysis
An arithmetic process used to calculate a property’s expired life and/or remaining
useful life.
Agency
A legal relationship between an agent and a principal in which the agent is autho-
rized and compelled to act on behalf of the principal.
503
Glossary of Terms
Aggregate Index
This index measures a selected group of items whose total cost at a point in time
is compared with the total cost in the base period. It may be unweighted or weighted and
considers total costs (a basket of goods).
Air Carrier
A person who undertakes directly by lease, or other arrangement, to engage in air
transportation.
Aircraft
A device that is used or intended to be used for flight in the air.
Airframe
Combination of fuselage, boom, nacelles, cowlings, airfoil surfaces, landing gear,
and controls.
Airplane
An engine-driven fixed-wing aircraft.
Airworthiness Certificate
The certificate carried in the airplane that indicates the aircraft is allowed to operate
and its category.
Allocation
A method of separating an asset’s value or expenditures among companies or indi-
vidual line-items.
Allocation of Purchase Price
Refers to the allocation of the lump sum paid to each asset acquired.
All-or-None Bid
A bid for a number of different items in which the bidder will not accept a partial
award, but only an award for all the items, services, etc. included in the bid.
Amortization
The measure of an intangible asset’s loss of value over time by a mathematical
formula to properly match revenues against the appropriated value of the asset.
Annuity
A series of payments of an equal, or constant, amount of money at fixed intervals
for a specified number of periods. A series of equal payments over time.
Appraisal
An appraisal is often referred to as an unbiased opinion of value of an identified
property based upon the investigation and analysis of pertinent data and the application
of appropriate analytical techniques. An appraisal according to USPAP: (noun) The act or
process of developing an opinion of value; an opinion of value; (adjective) of or pertaining
to appraising and related functions such as appraisal practice or appraisal services (USPAP
page U-1).
504
Glossary of Terms
Appraisal Consulting
The act or process of developing an analysis, recommendation, or opinion to solve
a problem, where an opinion of value is a component of the analysis leading to the assign-
ment results (USPAP page U-1).
Appraisal Date
The specific point in time as of which the valuator’s opinion of value applies (also
referred to as “Effective Date” or “Valuation Date”).
Appraisal Method
See Valuation Method
Appraisal Practice
Valuation services performed by an individual acting as an appraiser including,
but not limited to, appraisal review or appraisal consulting (USPAP page U-1); appraisal,
review, and consulting.
Appraisal Procedure
The act, manner, and technique of performing the steps of an appraisal method.
Appraisal Report
(See Report). The report must communicate each analysis, opinion, and conclusion
in a manner that is not misleading and contain sufficient information to enable the intended
users of the appraisal to understand the report properly and clearly and accurately disclose
all assumptions, extraordinary assumptions, hypothetical conditions, and limiting condi-
tions used in the assignment and must be prepared as a Self-Contained Appraisal Report,
Summary Appraisal Report, or Restricted Use Appraisal Report (USPAP page U-61).
Appraisal Review
The act or process of developing and communicating an opinion about the quality
of another appraiser’s work that was performed as part of an appraisal, appraisal review, or
appraisal consulting assignment (USPAP page U-1).
Appraised Value
The appraiser’s opinion or conclusion of value.
Appraiser
One who is expected to perform valuation services competently and in a manner
that is independent, impartial, and objective (USPAP page U-1).
Appraiser’s Peers
Other appraisers who have expertise and competency in a similar type of assign-
ment (USPAP page U-2).
Appreciation
An amount representing the increase in value resulting from changes in market
conditions or demand for a property over time.
505
Glossary of Terms
As-is, Where-is
A term reflecting the purchase of an item in its present condition and location. Any
costs associated with dismantling and removal are not considered.
Assessed Value
The value of property assigned by the local assessor for property tax purposes.
Asset-Based Approach
A valuation process of a business where assets and liabilities are measured at cur-
rent market value and intangible assets are added.
Asset Depreciation Range (DPR)
The range of depreciable lives permitted by the Internal Revenue Service for spe-
cific classes of assets. (ACRS tax depreciation has replaced depreciation using the ADR
depreciation.)
Asset Depreciation Range (ADR) – Leasing
Refers to regulations under the Internal Revenue Code Section 167 (m) which per-
mits shorter or longer than usual life to be used for tax depreciation.
Assets
Tangible or intangible assets that are expected to be of benefit in the future.
Asset-Specific Factors
Those factors directly related to the specific asset itself.
Assignment
1. An agreement between an appraiser and a client to provide valuation service;
2. the valuation service that is provided as a consequence of such an agreement
(USPAP page U-2).
Assignment Results
An appraiser’s opinions and conclusions developed specific to an assignment
(USPAP page U-2).
Assumed Earnings
A term used to signify that the assets being appraised are assumed to be capable of
generating an income sufficient to justify their appraised value.
Assumption
That which is taken to be true (USPAP page U-2).
Assumptions and Limiting Conditions
A listing of specific assumptions and limiting conditions that are applicable to an
appraisal.
Auction
A public sale of property where the contract of sale is formed by means of competi-
tive bids, submitted, and confirmed according to the pre-established terms and conditions
that govern the auction sale. The auctioneer is the person who conducts the sale and is
506
Glossary of Terms
compenated for such services. An auctioneer may sell the auctioneer’s own property or the
property of others. When selling property on behalf of another person, an auctioneer is an
agent of the seller for most purposes, but the auctioneer is an agent of both the seller and
buyer for the purpose of preparing and signing memoranda of sale.
Audit
Examination of the financial reporting statements, processes and controls to pro-
duce those financial statements.6
Average Cost Method
Average cost is an inventory costing method based on the average cost of inventory
during the period and the average cost is determined by dividing the cost of goods in inven-
tory by the number of units of the same type in inventory at any point in time.
Average Remaining Life
Average remaining term of service for asset(s) under investigation, usually ex-
pressed in years.
Balance Sheet
Financial report that provides a snapshot of a business’s position at a given point in
time, including its assets (economic resources), its liabilities (debts or obligations), and it’s
total or net worth (assets less liabilities).
Band of Investment
Weighted average cost of equity and debt. (See Weighted Average Cost of Capital.)
Bankruptcy
A legal proceeding, guided by federal law, designed to address situations where a
debtor—either an individual or a business—has accumulated obligations so great that he
or she is unable to pay them off.
Bargain Renewal Option
A provision in a lease that allows the lessee, at their option, to renew the lease for a
rental rate sufficiently lower than the fair rental rate for the property at the time the option
becomes exercisable so that the exercise of the option appears, at the inception of the lease,
to be reasonably assured.
Barrels per Calendar Day (bpcd)
The maximum amount a process unit or oil refinery can process during a 24-hour
period after making allowances for downstream bottlenecks, types of inputs and prod-
ucts, environmental constraints, turnarounds, and general maintenance and unscheduled
downtime.
Barrels per Stream Day (bpsd)
The amount a process unit or oil refinery can process during a 24-hour period run-
ning at full capacity under optimal conditions.
Barter
The trading of goods or services directly for other goods or services, without using
money or any other similar unit of account or medium of exchange.
507
Glossary of Terms
Base Term
The basic term of the lease used by the lessor in computing payout and relied upon
by the lessee as the minimum time period during which the lessee will have the use and
custody of the equipment.
Base Year
The first year to be considered in any set of data.
Basis Point
A way of quoting the yield on a bond, note, or other debt instrument. There are 100
basis points in 1%, therefore one basis point is equal to 0.01%.
Beginning Inventory
Merchandise on hand for sale to customers at the beginning of the accounting
period.
Beta
The measure of the volatility of the subject investment’s return relative to the vola-
tility of returns in the marketplace as a whole.
Betterment
A making or becoming better, an improvement that adds to the value of a property
or facility (Webster’s Ninth New Collegiate Dictionary).
Bias
A preference or inclination that precludes an appraiser’s impartiality, independence,
or objectivity in an assignment (USPAP page U-2).
Bill of Materials
The items necessary to make an end product. [These items are usually identified by
stock keeping units (SKUs) and may create another SKU (the finished item). See SKU.]
Blendstocks
Component materials that are mixed with the finished products to improve the qual-
ity of the products.
Bona Fide
A Latin term meaning “good faith”. In legal terms, it is often used to refer to a
purchaser or holder who takes something without fraud, deceit, or knowledge of a lien or
superior claim by another.
Book Value of an Asset
Cost of an asset (the amount that was paid for it) minus accumulated depreciation
for financial accounting purposes.
Book Value of Stock
The book value of the assets of a company less the liabilities. Can be translated into
book value per share by dividing by the number of shares outstanding. 7
508
Glossary of Terms
Bundle of Rights
The normal rights of ownership and use without restriction as considered all cu-
mulative rights, either jointly or severally. [Any severance of a right (such as the loss of a
warranty, use of name or trademark, or other right normally transferred) can have an effect
on value. See intangible personal property.]
Burdened Cost
Cost of materials, including freight in (cost to deliver to buyer), direct labor, and
manufacturing overhead (cost or production), equal burdened cost for a manufacturing
business. (Different companies may allocate burdened cost in different ways.)
Business
An integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs, or
other economic benefits directly to investors or other owners, members or participants.
(See Business Enterprise)
Business Combination
A transaction or other event in which an acquirer obtains control of one or more
businesses.
Business Enterprise (IVS)
A commercial, industrial, service, or investment entity pursuing an economic activ-
ity; generally, a profit-making enterprise. A business enterprise may be unincorporated (sole
proprietorships, partnerships) or incorporated (closely held or publicly held), or take the
form of trust arrangements or multiple entities. The ownership interest in a business may
be undivided, divided among shareholders, and/or involve a majority interest and minority
interest. Businesses may be valued by an asset-based approach, the income capitalization
approach, or the sales comparison approach. 8 (See Going Concern.)
Business Enterprise
The providing of goods and services involving financial, commercial and industrial
activity.
Business Enterprise Value
The value of the total invested capital (long-term debt and stockholder’s equity) in
an operating business. Nonoperating assets (i.e., excess land, idle equipment, etc.) are not
included.
Business Interruption Insurance
A policy that pays a stipulated amount when the business cannot operate because of
some insured disruption of operations.
Business Valuation
The act or process of determining how much a business is worth.
CAA
Clean Air Act
509
Glossary of Terms
Capacity Costing
The method engineers use to estimate breakeven analyses based on units of
production.
Capacity Creep
Small incremental increases in capacity over time.
Capacity factor
As it pertains to plant electrical capacity – a ratio of electricity generated by a plant
during a given time period to the electricity the plant could have generated if it had oper-
ated at its installed capacity during that period.
Capital
Cash or goods used to generate income.
Capital Asset
Any asset that has been capitalized on the company books.
Capital Asset Pricing Model (CAPM)
A method to calculate an equity return requirement based on the concept that any
stock’s required rate of return is equal to the risk-free rate of return plus the stock’s risk
premium. The basic CAPM model is reflected by the formula E(Ri ) = Rf + β(RPm) + RP.
Capital Expenditures (CAPEX)
Reserve of replacement or cash outflows necessary to support and maintain current
operations.
Capital Expenditure
An improvement, as distinguished from a repair, with a life of more than one year.
Capital Gain (or loss)
A category of gain or loss under the tax law resulting from the sale or other disposi-
tion of specified property such as stock or bond investments, real estate, machinery and
equipment, etc. It does not include property used in a trade or business.
Capital Lease
Under Federal Accounting Standards (FAS) 13, a lease meeting any of the follow-
ing criteria: A) The lease transfers ownership to the lessee at the end of the lease term; B)
The lease contains an option to purchase property at a bargain price; C) The lease term is
equal to 75 percent or more of the estimated economic life of the property (there are excep-
tions for used property leased toward the end of its useful life); or D) The present value of
minimum lease rental payments is equal to 90 percent or more of the fair market value of
the leased property less related Investment Tax Credit (ITC) retained by the lessor.
Capital Structure
The make-up of the invested capital of a business enterprise.
510
Glossary of Terms
Capitalization
A conversion of a single period of economic benefits into value. The procedure
estimates value by dividing an anticipated income stream, in constant dollars, by a capital-
ization rate.
Capitalization Factor
See Capitalization Rate.
Capitalization Rate
A multiple divisor (usually expressed as a percentage) used to convert anticipated
economic benefits of a single period into value. The annual rate of return on and return of
capital, equivalent to the risk assumed by an investor. It is consistent with a discount rate
less projected growth.
Capitalized Interest
Interest cost incurred during the time necessary to bring an asset to the condition
and location for its intended use and included as part of the historical cost of acquiring the
asset. 9
Capitalized Lease
A lease recorded as an asset acquisition accompanied by a corresponding liability
by the lessee. 10
Cash Basis
Method of bookkeeping by which revenues and expenditures are recorded when
they are received and paid. 11
Cash Basis of Accounting
Method of accounting in which sales and expenses are recorded only when pay-
ment is actually received or payment made as opposed to the accrual basis.
Cash Flow
Cash that is generated over a period of time by an asset, group of assets, or business
enterprise.12
Cash-Flow Analysis
A study of the anticipated movement of cash into or out of an investment.
Cash-Flow Assumption
An assumption regarding the flow of inventory costs through a firm’s accounting
system.
Cash Flow Statement
A financial statement that shows a company’s sources and uses of cash during an
accounting period.
Cash-on-Cash Return
Usually reserved for real estate income properties, it’s the annual cash flow from
the property divided by your cash investment. Sometimes called return on equity or equity
dividend rate.
511
Glossary of Terms
Casualty Value
A schedule included in a lease that states the agreed value of equipment at various
times during the term of the lease, and establishes the liability of the lessee to the lessor in
the event the leased equipment is lost or rendered unusable during the lease term due to a
casualty loss.
Category (Inventory)
A method of indicating assets by an alphabetic type. (e.g., clothing, hardware,
specified departments, etc.)
Caveat Emptor
A Latin term meaning “let the buyer beware.” It is a general rule of law that a
purchaser assumes the risk of his/her purchase.
C Corporation
This type of general, for-profit corporation is referred to as a “C” corporation (refer-
ring to Chapter C in the IRS Code).
Ceiling (Inventory)
In lower of cost or market computations, market (replacement cost) cannot be
higher than the ceiling (net realizable value). Net realizable value is selling price less sell-
ing costs and costs to complete.13
Central Processing Unit (CPU)
One of the 3 basic components of a computer system, the others being memory and
peripherals. The CPU is the device or microprocessing chip that serves as the computer’s
brain and it also processes all information handled by a computer.
Certification of Appraiser
A document required in all USPAP-conforming appraisal reports, signed by the
appraiser, whose signature certifies as to the accuracy of information, objectivity of the
appraiser, compliance with uniform standards, inspection of the property, and acknowledg-
ment of those contributing to the preparation of the appraisal.
Chart of Accounts
The list of account titles used to keep accounting records. 14
Chronological Age
The number of years that have elapsed since an item or property was originally
built or placed in service for the first time.
Class
A term used to identify types or groupings of property such as machinery, office
furniture, rolling stock, etc.
Close Out
A sale usually at greatly reduced prices.
512
Glossary of Terms
Closed-End Lease
A true lease in which the lessor assumes the risk of depreciation and residual value
(The lessee bears little or no obligation at the conclusion of the lease. This is usually a net
lease in which the lessee maintains, insures, and pays property taxes on the equipment.
The term is used to distinguish a lease from an open-end lease, particularly in automobile
leasing.)
Coinsurance
An arrangement under which the insured, in return for a reduced premium, agrees
to share in the loss in the proportion that the insurance carried bears to a specified percent-
age of the property insured. In the case of a partial loss where the property is not insured
for the indicated percentage of its cash value at the time of the loss, the recovery from the
company is based on a percentage.
Coinsurance Amount Limit
A requirement in an insurance policy that states that a minimum amount of insur-
ance must be maintained, based on the type and amount of item being covered.
Coinsurance Clause
If at the time of a loss it is determined that the insured carried inadequate limits, the
loss recovery will be a percentage of the total loss amount, calculated by dividing the actual
insured amount by the required amount.
Collateral
An item of value that is pledged to guarantee repayment of a loan.
Commencement Date
The first day of the basic lease term.
Commodity
Uniform quality goods actively traded in the market that are most often used as
inputs in the production of other goods or services such as crude oil, gasoline, wheat, and
corn.
Common Size Statement
A financial statement that displays all items as percentages of a common base
amount.
Comparables
Comparables refers to properties with characteristics that are similar to a subject
property whose value is being sought.
Comparative Sales Method
See Sales Comparison Approach.
Complexity
As it pertains to refineries – a measure of the relative construction costs of refinery
process units as they relate to the atmospheric crude distillation unit.
513
Glossary of Terms
Componentized Depreciation
The individual depreciation of the components of an asset to arrive at a total overall
depreciation.
Compound Interest
Interest computed on the sum of an original principal and accrued interest.
Compounding
When doing income analysis, the process of determining future value is referred to
as compounding.
Computer
An electronic tool used for rapid collection, organization, and communication of
large amounts of information.
Condemnation
The actual process of the taking of private property for public purposes by a public
body through the lawful use of its power of eminent domain.
Conditional Sale
A transaction for purchase of an asset in which the user, for federal income tax
purposes, is treated as the owner of the assets at the outset and throughout the term of the
transaction. (In leasing terminology, this is also called a conditional sale lease or a lease
intended as security.)
Conditional Sales Agreement (Lease)
See Conditional Sale.
Confidential Information
Information that is either 1) identified by the client as confidential when providing
it to an appraiser and that is not available from any other source; or 2) classified as confi-
dential or private by applicable law or regulation (USPAP page U-2).
Consigned Goods
Goods owned by one person or business that are being offered for sale by another
person or business.
Consignee
Individual who receives the goods and offers them for sale; the one in possession.
Consignments (Inventory)
A marketing method in which the consignor ships goods to the consignee, who acts
as an agent for the consignor in selling the goods. The inventory remains the property of
the consignor until sold by the consignee.15
Consignor
Owner who delivers the goods for sale by another, but retains title.
514
Glossary of Terms
Constant Dollar Accounting

A method of accounting using an index to account for inflation-induced fluctuation
in the value of the dollar; the method provides a historical view of the economic viability
of an individual, enterprise, or government.
Consulting
The business of providing advice to clients for a fee in order to help them solve a
particular problem or range of problems within a certain area of business.
Contingent Rentals – Leasing
Rentals in which the amounts are dependent upon some factor other than passage
of time.
Contribution
The concept that the value of a particular component is measured in terms of its
contribution to the value of the whole property, or as the amount its absence detracts from
the value of the whole.
Contributory Value
The contribution a particular component adds to the whole property.
Conventional Leveraged Lease
A leverage lease of the type contemplated by Internal Revenue Procedure 75-2.
CORN
An acronym for Cost of Replacement New. See Replacement Cost New.
Corporation
A fictitious legal entity/person, usually created under the authority of state law,
which is owned by its shareholders and his rights and duties independent of the rights
and duties of real persons which is legally authorized to act in its own name through duly
appointed agents.
Correlation
The process of evaluating conclusions developed from the three recognized ap-
proaches to value in an effort to arrive at a final conclusion of value. (See Cost Approach,
Market or Sales Comparison Approach, and Income Approach.)
Cost
Total dollar expenditure for any asset. This includes labor, materials, legal services,
architectural design, financing, taxes during construction, interest, contractor’s overhead
and profit, and entrepreneurial overhead and profit. The cost of a particular asset may be
higher than, lower than, or equal to the asset’s value.
Cost Approach
One of the three recognized approaches used in appraisal analysis. The appraiser
starts with the current replacement cost new of the property being appraised and then de-
ducts for the loss in value caused by physical deterioration, functional obsolescence, and
economic obsolescence. The logic behind this approach is the principle of substitution;
515
Glossary of Terms
a prudent buyer will not pay more for a property than the cost of acquiring a substitute
property of equivalent utility.
Cost Center
Any organizational segment or area of activity for which costs are accumulated.
Cost of Goods Manufactured
The total of direct materials used, direct labor, and factory overhead that results in
a finished product.
Cost of Goods Sold
The total cost of inventory sold during a specified period which includes the cost of
obtaining raw materials and producing finished goods for sale.
Costing
Process of developing original or historical costs of assets for accounting purposes.
Curable Depreciation
Depreciation in the form of deterioration and obsolescence that is economically
feasible to remedy because the resulting increases in utility and value are equal to or greater
than the expenditure. Curable depreciation is calculated by the “cost-to-cure.”
Current Asset
An asset that can reasonably be expected to last or be in use within one year.
Current Liabilities
Liabilities that are due to be paid within a year.
Current Value
1. Value of an asset at the present time as compared with the asset’s historical
cost.
2. In finance, the amount determined by discounting the future revenue stream
of an asset using compound interest principles. 16
CWA
The federal Clean Water Act (CWA) is the basic statute regulating discharges of
pollutants to waters of the United States by the National Pollutant Discharge Elimination
System permits.
Cycle Counting
A method of taking inventory throughout a specific period of time as broken into
time segments for specific areas or categories within a place of business.
Database
A group of collections of logically related items of information. Each collection is
referred to as a record. Examples include mailing lists and vendor lists.
Debt-free
Interest and the repayment of debt principal are not included in the analysis.
516
Glossary of Terms
Default
An event defined in a lease agreement as a default, such as failure to pay rent or
perform some obligation required under the terms of a lease.
Deflation
A decrease in the general price level.
Demand
A requirement for a product or service; alternately referred to as independent or
dependent demand.
Dependent Demand
Dependent demand is the demand for a product or service caused by the demand
for other products or services.
Depletion
The use or consumption of a resource faster than it is replenished.
Depreciable Cost
Historical or original cost of a property, less the estimated salvage value that can be
obtained for the property at the end of its useful life.
Depreciated Replacement Cost (DRC)
The replacement cost new of an item, less accrued depreciation from all causes.
Depreciation – Appraisal
Mathematical formula measure of a tangible asset’s loss of value over time to prop-
erly match revenues against the appropriated asset’s lost value (estimated expense). The
actual loss in value or worth of a property from all causes including those resulting from
physical deterioration, functional obsolescence, and economic obsolescence. Depreciation
may be curable or incurable. The estimated loss in value of an asset.
Depreciation – Accounting
An annual write-off of a portion of the cost of fixed assets. A non-cash expense of
doing business (such as recording that assets are going down in value over time.) A method
of recovering the purchase price or other basis in an asset over its life rather than deducting
the full amount immediately. Depreciation is often different for book and tax purposes.
Depreciation (Accumulated)
Account in which accrued depreciation provisions are totaled to a given date.
Depreciation Expense
A noncash expense used to depreciate the cost of an item over a specific period of
time.
Depreciation Method–Declining Balance (Accounting)
An accounting method under which an annual depreciation provision is computed
at a fixed percentage and applied to the unrecovered cost at the beginning of the period. The
unrecovered cost is reduced each year by the prior year’s depreciation. It is an accounting
517
Glossary of Terms
method that assumes that depreciation is dependent on the passage of time and allocates an
equal amount of depreciation.
Depreciation Method–Straight Line (Accounting)
An accounting method by which a charge is calculated by dividing the cost, less
salvage, by the number of fiscal periods of useful life.
Depreciation Method–Sum of the Years Digits (Accounting)
An accounting method that applies a changing rate to the cost, less salvage, wherein
the rate is a fraction, the denominator remains fixed and is equal to the sum of all the digits
of the years of useful life, and the numerator decreases each year and is equal to the years
of the remaining life at the beginning of the year.
Depreciation Rate
The rate or percentage used to calculate the depreciation charge.
Depreciation Recapture
When depreciated property is sold, the recapture is the difference between the as-
set’s adjusted basis and the selling price in excess of the amount of depreciation is the
amount of depreciation recapture.
Direct Capitalization Approach
This approach measures value by dividing a projected income stream, in constant
dollars, by a capitalization rate.
Direct Costing
A method that assigns only variable manufacturing costs (direct materials, direct
labor, and variable manufacturing overhead) to products; more appropriately termed vari-
able costing.
Direct Finance Lease – Leasing
A non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease
meets any of the criteria definitions of a capital lease, plus two additional criteria as follows:
1. Collectability of minimum lease payments must be reasonably predicable;
and
2. No uncertainties surround the amount of reimbursable costs to be incurred by
the lessor under the lease.
Direct Labor
The gross wages of personnel who work directly on the goods being produced.
Direct Materials
All materials that form an integral part of a finished product that can be readily
traced to the finished product.
Direct Overhead
Those costs directly related to manufacturing activity.
518
Glossary of Terms
Direct (Variable) Costing (Inventory)

This method includes only variable manufacturing costs in the cost of ending fin-
ished goods inventory. This method is not acceptable for financial reporting purposes.17
Direct Dollar Measurement
A method to estimate deterioration or obsolescence by considering the amount of
money required to economically cure the deficiency.
Direct Lease (Financing)
Under Federal Accounting Standards (FAS) 13, a nonleveraged lease by a lessor
(not a manufacturer or dealer) in which the lease meets any of the criteria definitions of
a capital lease plus two additional criteria as follows: A) Collection of minimum lease
payments must be reasonably predictable; and B) No uncertainties surround the amount of
non-reimbursable costs to be incurred by the lessor in a direct financing lease. Also known
as a direct financing lease.
Direct Materials
Raw materials that become an integral part of the finished product and are conve-
niently and economically traceable to specific units of productive output.
Direct Sales Comparison
When exact, or like, sales or offerings are found in the marketplace that sold under
market or liquidation sale conditions.
Discount Rate
The rate of return used in discounting the future benefits generated by an asset or
group of assets to determine present value; the return required to cause an investor to invest
in the type of asset in question. When used to discount future benefits, the required rate of
return is called the discount rate.
Discounted Cash Flow (DCF)
The application of a factor, based on the cost of the firm’s capital or prevailing
interest rates (with a possible adjustment for risk), to the cash inflows and outflows from a
project or investment. Present value of future cash estimated to be generated. Also called
net present value analysis. A technique for determining what a business is worth today in
light of its cash yields in the future.
Discounted Cash Flow Method
See Discounted Cash Flow.
Discounting
The process used to determine present value.
Disk Operating System (DOS)
A specialized program that creates an environment in which other programs can
operate.
519
Glossary of Terms
Dollar-Value Method
Used in accounting as a method of pricing last in, first out (LIFO) inventories in
which goods and products have to be grouped into one or more pools (classes of items),
depending on the kinds of goods or products in the inventories. Also a variation of con-
ventional LIFO in which layers of inventory are priced in dollars adjusted by price indices,
instead of layers of inventory priced at unit prices.18
Due Diligence
Requirement found in ethical codes that the person governed by the ethical rules
exercise professional care in conducting his or her activities.
EBITDA
Earnings before interest, taxes, depreciation, and amortization.
Economic Benefits
Inflows such as revenues, net income, net cash flows, etc. 19
Economic Life
See Economic Useful Life.
A form of depreciation where the loss in value or usefulness of a property is caused
by factors external to the property. These may include such things as the economics of the
industry; availability of financing; loss of material and/or labor sources; passage of new
legislation; changes in ordinances; increased cost of raw materials, labor or utilities (with-
out an offsetting increase in product price); reduced demand for the product; increased
competition; inflation or high interest rates; or similar factors.
Economic Useful Life
The estimated period of time that a new property may be profitably used for the
purpose for which it was intended. Stated another way, economic life is the estimated
number of years that a new property can be used before it would pay the owner to replace
it with the most economical replacement property that could perform an equivalent service.
Functional or economic obsolescence factors may limit a property’s economic life. An
asset’s economic life will often be less than its normal useful life.
Effective Age (EA)
The apparent age of a property in comparison with a new property of like kind;
that is, the age indicated by the actual condition of a property. (This may be calculated by
deducting the Remaining Useful Life of an asset from the Normal Useful Life.)
Effective Date
The date at which the value opinion in an appraisal applies, which may or may not
be the date of inspection or the date the report is issued. (See Valuation Date.)
Electronic Mail (E-mail)
Text-based communication electronically transmitted by users of online services.
520
Glossary of Terms
Eminent Domain
The power of a public body to acquire private property for public purposes. Usually
includes some payment of just compensation to the property owner.
Ending Inventory
Merchandise on hand for sale to customers at the end of the accounting period.
EPA
Environmental Protection Agency
Equipment
All machinery and other apparatus or implements used in an operation or activity.
Equity
The net worth of a company. The owner’s interest in property after deduction of all
liabilities. Also called owner’s equity or capital.
Equity Net Cash Flows
The cash flows available to pay to equity holders (in the form of dividends) after
funding operations of the business enterprise, making necessary capital investments, and
increasing or decreasing debt financing. 20
Equivalent Distillation Capacity (EDC)
The summation of the size of each oil refinery process unit multiplied by its
complexity.
Equity Risk Premium
An amount added to a risk-free rate to reflect the additional risk of equity over the
risk free rate.
Escheat
The reversion of property to a government entity in the absence of legal claimants
or heirs.
Estates
Ownership rights and interests in property.
Estimate
An opinion of value.
Estimated Remaining Useful Life
The period over which an item or group of items is estimated to remain usable.
Estimated Residual Value of Leased Property
The estimated value of the property at the end of the lease term and as defined in
the lease.
Evaluation
A study of the nature, quality, or utility of a property, or interest in or aspect of the
property, without reference to a value estimate.
521
Glossary of Terms
Excess Capacity
The capital machinery equipment that provides for greater production than de-
manded. In some instances, this could be the extra capacity is available on a standby basis
during peak usage periods or when other machinery is down for repair.
Excess Capital Cost
A type of functional obsolescence that typically results from changes in production
or construction methods, equipment use, etc. (May be reflected by the difference between
reproduction and replacement cost new excluding any consideration for betterment.)
Excess Liability Insurance
A policy that covers losses that exceed those covered under another policy. Also
known as an umbrella policy.
Exclusion (Insurance)
A provision in an insurance contract describing property or types of property that
are excluded from coverage.
Expense Accounts
Accounts used to keep track of expenses.
Extended Cost
Quantity of items multiplied by unit cost.
Extraordinary Assumption
An assumption directly related to a specific assignment, which, if found to be false,
could alter the appraiser’s opinions or conclusions (USPAP page U-3).
Face Lifting
A renovation that restyles or modernizes.
Fair Market Purchase Option – Leasing
An option to purchase leased property at the end of a lease at its then fair market
value.
Fair Market Rental Value – Leasing
The expected rental for equivalent property under similar terms and conditions.
Fair Market Sales Value – Leasing
The expected selling price in an arm’s length transaction between a willing buyer
and a willing seller for equivalent property under similar terms and conditions.
Fair Market Value (FMV)
An opinion expressed in terms of money, at which the property would change hands
between a willing buyer and a willing seller, neither being under any compulsion to buy
or to sell and both having reasonable knowledge of relevant facts, as of a specific date.
(In the valuation of personal property, this definition must be further defined based on the
function, use and purpose of the appraisal.)
522
Glossary of Terms
Fair Market Value–Installed

An opinion, expressed in terms of money, at which the property would change
hands between a willing buyer and a willing seller, neither being under any compulsion to
buy or to sell and both having reasonable knowledge of relevant facts, considering market
conditions for the asset being valued, independent of earnings generated by the business in
which the property is or will be installed, as of a specific date.
Fair Market Value In Continued Use with Assumed Earnings
buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date
and assuming that the business earnings support the value reported, without verification.
Fair Market Value In Continued Use with an Earnings Analysis
buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date
and supported by the earnings of the business.
Fair Market Value–Removed
buy or to sell and both having reasonable knowledge of relevant facts, considering removal
of the property to another location, as of a specific date.
Fair Rental – Leasing
The expected rental for equivalent property under similar terms and conditions.
Fair Value (FASB #157)
The price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between marketplace participants at the measurement date. (This
statement also explains that a fair value measurement of an asset assumes its highest and
best use by market participants. Such use would maximize the value of the asset or group
of assets within which the asset would be used, regardless of the intended use of the asset
by the reporting entity. 21
Fair Value (SFAS #141)
The amount at which an asset (or liability) could be bought (or incurred) or sold
(or settled) in a current transaction between willing parties, that is, other than a forced or
liquidation sale. 22
Fairness Opinion (FASB #157)
An opinion as to whether or not the consideration in a transaction is fair from a
financial point of view. 23
FASB
Financial Accounting Standards Board. An organization whose mission is to es-
tablish and improve standards of financial accounting and reporting for the guidance and
education of the public, including issuers, auditors and users of financial information. 24
523
Glossary of Terms
FAS 13
Statement of Financial Accounting Standards 13, Accounting for Leases; FASB,
Stamford, Connecticut, November 1976 (This sets formal financial accounting standards
on accounting for leases.)
Feasibility Analysis
A study of the cost-benefit relationship of an economic endeavor (USPAP page
U-3).
Fee Simple Estate
Absolute ownership unencumbered by any other interest or estate; subject only to
the limitations of eminent domain, escheat, police power, and taxation.
Fiduciary
A person occupying a position of trust in relationship to another person or group of
persons.
Finance Lease
A type of equipment lease originally authorized by TEFRA (Tax Equity and Fiscal
Responsibility Act), commencing January 1, 1984, but postponed effective March 7, 1984,
until January 1, 1988, by the Deficit Reduction Act of 1984. A finance lease is similar to a
true lease except that a finance lease may contain a purchase option equal to 10 percent or
more of the original cost of the equipment and/or the leased equipment may be limited use
property. Finance leases are limited to new property.
Financial Accounting Standard 13 (FAS 13)
Statement of Financial Accounting Standards Number 13, Accounting for Leases;
Financial Accounting Standards Board, Stamford, Connecticut, November 1976. Sets for-
mal financial accounting standards on accounting for leases.
Financial Accounting Standards
Official promulgations, known as statements of financial accounting standards, by
the financial accounting standards board (FASB) which are part of generally accepted ac-
counting principles (GAAP25) in the United States. 26
Financial Accounting Standards Board (FASB)
Independent, private, non-governmental authority for the establishment of account-
ing principles in the United States. Also see: FASB 27
Financial Statements
Presentation of financial data including balance sheets, income statements and
statements of cash flow, or any supporting statement that is intended to communicate a
financial position.
Financing Agreement
An agreement among the owner trustee, the lenders, the equity participants, and the
lessee that spells out the obligations of the parties under a leveraged lease. Also called a
Participation Agreement.
524
Glossary of Terms
Financing Agreement – Leasing

An agreement between the owner trustee the lenders the equity participants, the
manufacturer and the lessee which spells out the obligations of the parties under a lever-
aged lease. Also called a participation agreement.
Finished Goods (Inventory)
The inventory of completed production that is owned by a firm as packaged and
ready for delivery; items that have completed the production process and are ready for sale.
Finished Goods and Merchandise Inventories
Estimated selling prices less the sum of the costs of disposal and a normal profit.
FIRREA
Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
First-in, First-out Method (FIFO)
An accounting method for inventory—it assumes that inventory costs will be in-
curred in chronological order of purchase. [This means that the cost of the first goods
acquired will be the first cost charged out. (Cost of goods will be lower and the closing
inventory will be higher in times of inflation when prices are rising. The reverse is true in
times of falling prices.)] Commonly known as FIFO.
Fixed Assets
Include real estate, physical plant, leasehold improvements, equipment (from of-
fice equipment to heavy operating machinery), vehicles, fixtures, and other assets that can
reasonably be assumed to have a life expectancy of several years. Fixed assets also include
intangibles like the value of trademarks, copyrights, and a difficult category known as
“good will.”
Fixed Costs
Costs that do not vary with production or sales.
Fixture
An item of property that once was movable, but has since been installed or attached
to the land or building in a rather permanent manner in such a way that it is regarded in law
as part of the real estate.
Floating Rental Rate – Leasing
Rental which is subject to upward or downward adjustments during the lease term.
Floating rents sometimes are adjusted in proportion to prime interest rate or commercial
paper rate changes during the term of the lease.
Floor (Inventory)
In lower of cost or market computations, market is limited to net realizable value
less a normal profit, called the floor. Market (replacement cost) cannot be below the floor.28
Inventory cannot be valued lower than the “floor” which is the net realizable value of the
inventory less an allowance for a normal profit margin.
525
Glossary of Terms
Floor Plan (Inventory)

Common method of financing used by merchants, whereby through a credit agree-
ment with a lending institution, the lending institution pays the supplier, holds title to the
goods, and collects a small down payment from the merchant. [The balance of the cost
(released price) is not paid until the goods have been sold.]
FOB (Free On Board)
Referencing purchased goods placed on board the means of transportation at a
specified geographic point free of any loading and transportation charges to that point.
FOB Destination
Freight term indicating that the seller incurs transportation charges.
FOB Shipping Point
A freight term indicating that the purchaser incurs transportation charges.
Forced Liquidation Value (FLV)
An opinion of the gross amount, expressed in terms of money, that typically could
be realized from a properly advertised and conducted public auction, with the seller being
compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific
date.
Full Absorption (Full Costing) (Inventory)
In accordance with GAAP, this method includes all manufacturing costs (fixed and
variable) in the cost of finished goods inventory.29
Full Payout Lease
For FAS 13, a lease that qualifies as a direct financing lease or sales-type lease.
(The definition of a full payout lease depends on the context in which it is used. Generally,
the term full payout lease refers to a lease in which the cash flows from firm rents and
an estimated conservative residual value will return to the lessor an acceptable return on
investment and the cost of the leased equipment after payment of the cost of financing and
overhead.)
Full-Service Lease
A lease that obligates the lessor to provide maintenance and repair and to insure the
leased equipment (The lessor also pays the property taxes. Full-service leases are nearly
always true leases in which the lessor owns the equipment at the end of the lease.)
A form of depreciation in which the loss in value or usefulness of a property is
caused by inefficiencies or inadequacies inherent in the property itself, when compared to
a more efficient or less costly replacement property that new technology and changes in
design, materials, or process that result in inadequacy, overcapacity, excess construction,
lack of functional utility, excess operating costs, etc. has developed. Symptoms suggest-
ing the presence of functional obsolescence are excess operating cost, excess construction
(excess capital cost), over-capacity, inadequacy, lack of utility, or similar conditions.
526
Glossary of Terms
Future Value (FV)

The amount that an investment will be worth at a future date.
Future Value of an Annuity
The sum of all of the future payment values in an annuity.
GAAP
The Generally Accepted Accounting Principles that are the common set of account-
ing principles, standards and procedures. 30
GAAS
See generally accepted auditing standards. Also see: Generally Accepted Auditing
Standards.
GAO
The independent accounting and auditing agency of the United States government
that reviews federal financial transactions and reports directly to Congress.
GASB
The group that has authority to establish standards of financial reporting for all
units of state and local government. Governmental Accounting Standards Board
General Ledger
The group of all of the balance sheet, income and expense accounts used to keep
business accounting records.
Generally Accepted Accounting Principles (GAAP)31
The conventions, rules, and procedures used to define accepted accounting practice
at a particular time.32 As related to inventory, a method of keeping inventory controls for
an ongoing enterprise.
Generally Accepted Auditing Standards (GAAS)
The standards set by the American Institute of Certified Public Accounts (AICPA)
which concern the auditor’s professional qualities and judgment in the performance of an
audit and in the audit report.
Going Concern
An ongoing business enterprise.
Going Concern Value
The value of a business enterprise that is expected to continue to operate.
Goods In Transit (Inventory)
Goods in the hands of a common carrier or other similar carrier are deemed to be
in transit.
527
Glossary of Terms
Goodwill
That intangible asset arising as a result of name, reputation, customer loyalty, loca-
tion, products, and similar factors not separately identified. Also the amount paid in the
acquisition of an entity over the fair value of its identifiable tangible and intangible assets
less liabilities assumed.
Grantee
The one whom property is transferred.
Grantor
The one who transfers property or the one who creates a trust.
Grantor Trust – Leasing
A trust used as the owner trust in a leveraged lease transaction, usually with only
one equity participant. The Internal Revenue Code refers to such a trust as a grantor trust
(See Section 671). With more than one equity participant the grantor trust is usually treated
as a partnership.
Gross Book
The amount shown in the assets section of a financial balance sheet as the capital-
ized cost of property.
Gross Income
The total revenue received before any deductions.
Gross Margin
Revenues less raw material expense; a useful level of earnings to test for economic
obsolescence.
Gross Profit (Inventory)
The result of subtracting cost of sales from net sales. Also referred to as gross
margin.33
Gross profit
The amount of net sales minus the cost of sales.
Gross Profit Method (Inventory)
A method used to estimate the amount of ending inventory based on the cost of
goods available for sale, sales, and the gross profit percentage.34
Hard Costs
The direct costs of acquiring a business (such as the purchase price), constructing a
building (brick and mortar), etc., or purchasing and installing an item of personal property
such as machinery and equipment as opposed to legal, accounting, consulting, financing,
costs, which are called soft costs.
Hardware
As it pertains to computer equipment, hardware is a term often synonymous with
Equipment. Used lately as all the equipment needed for the operation of a computer system.
528
Glossary of Terms
High-Low Debt – Leasing

Leveraged debt with higher payments earlier in the lease than later in the lease.
High-Low Rent – Leasing
A lease in which rents are higher earlier in the term than later in the term.
Highest and Best Use
The most probable and legal use of a property (including machinery and equip-
ment), which is physically possible, appropriately supported, financially feasible, and that
results in the highest value. (The four criteria that highest and best use must meet are
legally permissible, physically possible, financially feasible, and maximally profitable.)
Hire-Purchase Agreement – Leasing
A conditional sale lease.
Historical Cost
The original total purchase price (including all freight and installation) of a prop-
erty when it was first placed into service by its first owner.
HMTA
Hazardous Material Transportation Act
Holding Company
An entity that derives its returns from investments rather than from the sale of
products or services.
Hurdle Rate
See margin
Hypothetical Condition
That which is contrary to what exists but is supposed for the purpose of analysis
(USPAP page U-3).
Ibid
An abbreviation of the Latin term ibidem, meaning “in the same place; in the same
book; on the same page.” It is also abbreviated as id.
Impairment
A situation where the carrying value of the assets (either tangible or intangible)
exceeds the fair value of those same assets.
Implied Warranty
A guarantee that is assumed despite the fact that it is not written down or explicitly
spoken.
Improvement
A change or addition that improves; the act of improving something; a condition
superior to an earlier condition. An expenditure directed to a particular asset to improve its
performance or useful life.
529
Glossary of Terms
In Continued Use
A value assigned to an asset assuming that the asset is sold as part of an on-going
operation and assumes that the asset is sold and consequently operated with the other assets
in its group. (Also see In Use.)
In Use
A value assigned to an asset assuming that the asset is sold as part of an on-going
operation and assumes that the asset is sold and consequently operated with the other assets
in its group. (Also see In Continued Use.)
Income
Amount of revenue received. Also see: Net Income.
Income Approach
One of the three recognized approaches used in appraisal analysis. (This approach
considers value in relation to the present worth of future benefits derived from ownership
and is usually measured through the capitalization of a specific level of income.) The ap-
praiser determines the present value of the future economic benefits of owning the property.
Income (Income-Based) Approach
A general way of determining a value indication of a business, business ownership
interest, security, or intangible asset using one or more methods that convert anticipated
economic benefits into a present single amount. 35
Income Statement
A financial statement that shows the amount of income, expenses and net profit (or
loss) by a business over an accounting period. Also known as “profit and loss statement”.
Incurable Depreciation
Depreciation in the form of deterioration and obsolescence that is not economically
feasible to remedy because the resulting increases in utility and value are less than the
expenditure. Incurable depreciation is typically reflected as a percentage (%) estimate to
allow for loss in value.
Incurable Functional Obsolescence
A defect caused by a deficiency or superadequacy in the structure, materials, or
design of an item that cannot be practically or economically corrected.
Indemnitee
A party who is indemnified by another against loss or damage from specific
liabilities.
Indemnity Agreement – Leasing
When used in the context of leveraged lease, an agreement whereby the owner
participants and the lessee indemnify the trustees from liability as a result of ownership of
the leased equipment.
530
Glossary of Terms
Indemnity Clause – Leasing

This refers to indemnity provisions in a lease. There are three standard indemnity
sections in leveraged lease financing: the general indemnity, the general tax indemnity,
and the special tax indemnity. In leveraged leases, the tax indemnity clauses can be quite
lengthy and are sometimes contained in a special supplement to the lease agreement. Al-
though lease documentation contains various indemnities, the indemnity clause usually
refers to the tax indemnity clause whereby the lessee indemnifies the lessor against the loss
of tax benefits.
Indemnity Trustee – Leasing
Some leveraged leases have a separate indenture trustee in addition to an owner
trustee. The indenture trustee holds the security interest in the leased equipment for the
benefit of the lenders. In the event of default, the indenture trustee exercises the rights of
a mortgagee. The indenture trustee also is responsible for receiving rent payments from
the lessee and using such funds to pay the amounts due the lenders with the balance being
paid to the owner trustee. The indenture trustee sometimes verifies that correct filings are
made to protect the security interest of the lenders, although the lessee usually is obligated
to cause the delivery of annual opinions of counsel as to continued perfection. The bond
register is maintained by the indenture trustee, who also acts as transfer agent.
Indenture of Trust – Leasing
An agreement between the owner trustee and the indenture trustee whereby the
owner trustee mortgages the equipment and assigns the lease and rental payments under
the lease as security for amounts due to the lenders (Occasionally, particularly in maritime
financing, the owner trustee will mortgage the leased property to the indenture trustee
under a maritime mortgage instrument, separate from but subject to the indenture of trust.
This is the same as a security agreement or mortgage.)
Independent Demand
Independent demand is the demand for a product. However, its demand cannot be
derived directly from that of another product.
Indexing
A method used to estimate current cost in which an index factor is applied to the
historical cost of an item reflecting the movement of cost over time (See Trending.)
Indirect Comparison Methodology
When an appraiser uses a sale of a similar, but not the same, manufacturer or model,
to estimate the value of the subject.
Indirect Costs
Costs indirectly incurred in the purchase and placement of an asset into functional
use (This may include normal administrative costs, professional fees, financing costs dur-
ing construction, insurance, security, training, architectural and engineering fees, and oth-
ers, but it excludes all abnormal costs.)
Indirect Labor
The wages of factory employees who do not work directly on the product.
531
Glossary of Terms
Indirect Materials
Minor material items used in manufacturing a product.
Inflation
An economic condition the signs of which include rising prices and reduced pur-
chasing power.
Initial Direct Costs – Leasing
Costs incurred by a lessor directly associated with negotiating and completing a
transaction such as commissions, legal fees, costs of credit checks, documentation costs,
allocable sales expenses (including salaries other than commissions), and similar expens-
es; but specifically excluding supervisory, administrative, or other indirect or overhead
expenses.
Initial Term – Leasing
The initial period of time for which equipment is leased exclusive of renewals.
Insurable Value
The value of that portion of a property covered by insurance in accordance with the
terms of the insurance policy or other agreements.
Insurable Value Depreciated (IVD)
The insurance replacement or reproduction cost new less accrued depreciation con-
sidered for insurance purposes, as defined in the insurance policy or other agreements, as
of a specific date.
Insurance Replacement Cost New (IRCN)
The replacement or reproduction cost new, as defined in the insurance policy, less
the cost new of the items specifically excluded in the policy, as of a specific date.
Insurance Value
The value of that portion of a property covered by insurance in accordance with the
terms of the insurance policy or other agreement,
Insurance Value Depreciated
The insurance replacement or reproduction cost less accrued depreciation consid-
ered for insurance purposes, and as defined in the insurance policy or other agreement, as
of a specific date.
Insured Value – Leasing
A schedule included in a lease which states the agreed value of equipment at vari-
ous times during the term of the lease and establishes the liability of the lessee to the lessor
in the event the leased equipment is lost or rendered unusable during the lease term due to
a casualty.
Intangible Assets
Assets that do not take on a physical form.
Intangible Costs
Costs incurred to create an intangible asset.
532
Glossary of Terms
Intangible Personal Property

That portion of an item in which rights cannot be transferred in exchange at the
same level of trade.
Intended Use
The use or uses of an appraiser’s reported appraisal, appraisal review, or appraisal
consulting assignment opinions and conclusions, as identified by the appraiser based on
communication with the client at the time of the assignment (USPAP page U-3).
Intended User
The client or any other party as identified, by name or type, as users of the appraisal,
appraisal review, or appraisal consulting report by the appraiser on the basis of communi-
cation with the client at the time of the assignment (USPAP page U-3).
Interest (Financial)
The cost associated with the use of money for a specific period of time.
Interest Rate Implicit in a Lease (as used in FAS 13) – Leasing
The discount rate which, when applied to minimum lease payments (excluding
executor costs paid by the lessor) and unguaranteed residual value, causes the aggregate
present value at the beginning of the lease term to be equal to the fair value of the leased
property at the inception of the lease minus any investment tax credit retained by the lessor
and expected to be realized by him.
Intermediates
Partially finished components requiring further processing to maximize their value.
Internal Rate of Return (IRR)
The annualized rate of return on capital that is generated or can be generated by an
investment over a period of ownership. It is equivalent to the discount rate that makes the
net present value of an investment equal to zero.
Internal Revenue Service (IRS)
A federal agency that interprets and enforces the U.S. tax laws governing the as-
sessment and collection of revenue for operating the government.
Internet
A global network of computer networks that provides access to information and
data files provided by universities, libraries, governmental and legislative bodies, corpora-
tions, associations, and individuals.
Intrinsic Value
The value that an investor considers, on the basis of an evaluation or available facts,
to be the “true” or “real” value that will become the market value when other investors
reach the same conclusion.
Inventory
(verb) A term used to identify the compilation of fixed asset data or information
created during an appraisal.
533
Glossary of Terms
(noun) Also defined as those items of tangible property that are held for sale in the
normal course of business, are in the process of being produced for such purpose, or are to
be used in the production of such items36. [As defined by UCC 9.109, “Inventory consists
of goods that are held by a person or business or entity for sale or lease, or to be furnished
under contract(s) of service—or have been so furnished—whether raw materials, work in
process, or materials used and consumed in a business.”]
Inventory Cost
Cost recorded upon purchase of inventory; includes invoice price less cash dis-
counts plus freight and transportation and applicable insurance, taxes, and tariffs.
Inventory Layer (Inventory)
Under the LIFO method, an increase in inventory quantity during a period37.
Inventory Mix
The makeup of inventory considering its quantities, condition, variations in market
acceptance, specialization, adaptability, technology, and in some cases, overall component
count.
Inventory Supplies
Items of an expendable nature used in the operation of a business or profession but
not offered for sale are called supplies. Also see supplies.
Inventory Turnover
The number of times that the investment in merchandise or stocks on hand is re-
placed during a stated period, usually 12 months.
Invested Capital
The sum of equity and debt in a business enterprise.
Investment Risk
The uncertainty pertaining to future benefits to be derived from an investment.
Investment Tax Credit (ITC)
A credit against taxes due equal to 10% for equipment with a recovery period of 5
years or more, and 6% for equipment with a recovery period of 3 years. The amounts are
reduced 2% on election by the taxpayer in lieu of the otherwise required tax basis reduc-
tion. Note: Repealed in 1986.
Invoice
A source document used to record sales of merchandise.
Invoice Price
List price less applicable trade discounts.
Iowa Curves
A series of 22 statistical survivor curves developed by Iowa State University that
predict the percentage of assets within a given group that will retire at various points dur-
ing the life of the group. The curves are based on empirical data collected (mainly in the
1930s) by Iowa State University for the purpose of statistically predicting future service
534
Glossary of Terms
expectancy for various tangible properties. (Similar to human mortality curves used in the
insurance industry.)
IRC
Internal Revenue Code
IRR
Internal rate of return
IRS
Internal Revenue Service
ITC
See Investment Tax Credit.
Item-by-Item Method
A method of applying the lower-of-cost-or-market rule to inventory pricing.
Item Specific Economic Obsolescence
Obsolescence caused by external forces that may only be impacting a specific par-
ticular item or group of items.
Job Shop
A type of manufacturing process in which small batches of a variety of custom
products are made. In the job shop process flow, most of the products produced require a
unique set-up and sequencing of process steps.
Joint Venture
A undertaking between two or more parties.
Jurisdictional Exception
An assignment condition established by applicable law or regulation, which pre-
cludes an appraiser from complying with a part of USPAP (USPAP page U-3).
Just-In-Time
An inventory management policy whereby materials and components are delivered
just in time for the manufacturing process.
Landed Cost
Original cost plus freight.
Last-in, First-out Method (LIFO)
An inventory costing method under which the costs of the last items purchased are
assigned to the first items sold and the cost of the inventory is composed of the cost of items
from the oldest purchase. Also defined as a cost flow assumption; the last goods purchased
are assumed to be the first goods sold.38
Last Year’s Sales/Usage
Total units sold or used last year for each product/style code.
535
Glossary of Terms
Lease
A conveyance of the right to use property by the owner (lessor) to another (lessee)
for a specified period in return for a monetary or other consideration usually in the form of
rent.
Lease Intended as Security
A lease in which the lessee is considered owner for both legal and federal income
tax purposes. A conditional sale or installment purchase for income tax purposes.
Lease-Purchase
An agreement to buy a particular piece of property within a certain time-frame,
usually at a price determined beforehand.
Lease Rate
The equivalent simple annual interest rate implicit in minimum lease rentals (This
is not the same as interest rate implicit in a lease.)
Lease Schedule
A listing of items subject to a lease that describes the items in detail. The schedule
may reflect the lease term, the commencement date, and the location of the equipment and
be incorporated into the basic lease agreement by reference.
Lease-Specific Factors
Factors contractual in nature and inherent in the lease itself.
Lease Term
The fixed, non-cancelable term of a lease. Includes, for accounting purposes, all
periods covered by fixed-rate renewal options for which economic reasons appear likely to
be exercised at the inception of the lease. Includes, for tax purposes, all periods covered by
fixed-rate renewal options.
Leasehold
The property interest a lessee has in the leased property without transfer of
ownership.
Lessee
The person or entity that has the right to use property under the terms of a lease. 39
Lessor
A party who owns property and leases the asset to a lessee and permits the lessee to
use the asset in accordance with the lease contract. (Legal title under the Uniform Com-
mercial Code may be with the lessee in finance leases and nontax-oriented leases.)
Lessor – Leasing
The owner of the equipment which is being leased to a lessee or user.
Letter of Intent
A document in which one or more parties signify an intention to do or to refrain from
doing one or several things. Letters of intent are generally non-binding and unenforceable.
536
Glossary of Terms
Level of Trade
There may be different levels at which goods are traded or transferred. Level of
trade entails the various levels at which goods are bought and sold. Personal property has
several measurable marketplaces. Therefore, the appraiser should define and analyze the
appropriate market consistent with the type and definition of value.
Leverage
An amount borrowed (A lease is sometimes referred to as 100% leverage for the
lessee. In a leveraged lease, the debt portion of the funds used to purchase the asset repre-
sents leverage of the equity holder.) 1. Financial leverage is the act of increasing the return
on an investment by borrowing some of the funds at an interest rate less than your return
on the project. 2. Operating leverage has the same objective, but you increase your return
by increasing cheaper fixed costs. Leverage can be positive or negative. If the return on an
investment is greater than the cost of borrowing, leverage is positive. If the return is less,
leverage is negative.
Leveraged Lease
A true lease or a finance lease that meets the definition criteria for a direct financing
lease or a capital lease, plus all of the following characteristics: A) At least three parties are
involved: a lessee, a lessor, and a long-term lender; B) The financing provided by the lender
is substantial to the transaction and without recourse to the lessor; and C) The lessor’s net
investment typically declines during the early years of the lease and rises during the later
years of the lease.
Leveraged Buy Out
Acquisition of a controlling interest in a company using significant amounts of
financing.
Liabilities
Obligations to other entities as a result of past transactions. In business, liabilities
are balance sheet accounts, accounts payable, payroll taxes payable and loans payable.
Lien
A type of encumbrance on a property for a debt or for an obligation.40
LIFO (last in, first out)
An accounting method for inventory – the most recently incurred costs are charged
off first, leaving the earlier incurred cost in the ending inventory.
LIFO Conformity Rule (Inventory)
A statutory requirement in the U.S. that dictates if the LIFO method is used for
income tax purposes, it must also be used for financial reporting purposes.41
LIFO Liquidation (Inventory)
Liquidation of the LIFO base or old inventory layers when inventory quantities
decrease. This liquidation can distort income since old costs are being charged to cost of
goods sold and matched against current revenues.42
537
Glossary of Terms
LIFO Reserve (Inventory)

The difference between LIFO values and replacement cost. (Current value = LIFO
+ LIFO reserves – Depreciation) Also, the difference, at a specified date, between in-
ventory valued using LIFO and inventory valued using the method the company uses for
internal management or reporting purposes.43
LIFO Retail (Inventory)
An inventory costing method which combines the LIFO cost flow assumption and
the retail inventory method.44
Limited Liability Company (LLC)
Form of doing business combining limited liability for all owners.45
Limited Partnership
Partnership in which one or more partners, but not all, have limited liability to
creditors of the partnership. 46
Limited Use Property
Property that is uniquely valuable to the lessee and not valuable to anyone else
except as scrap. A lease of special purpose property will not qualify as a true lease because
the lessee controls the residual value.
Line Item
A specific account that categorizes or groups common expenditures.
Liquid Asset
An asset that can be readily spent or transferred to cash.
Liquidation – Financial
Winding up an activity by distributing its assets to the appropriate parties and set-
tling its debts or turning fixed assets into liquid assets, namely into cash.
Liquidation Value
The amount that would be realized if the assets are sold either under “orderly”
or “forced” conditions. (See Orderly Liquidation Value, Forced Liquidation Value and
Liquidation Value in Place.
Liquidation Value In Place (LVIP)
An opinion of the gross amount, expressed in terms of money that typically could
be realized from a properly advertised transaction, with the seller being compelled to sell,
as of a specific date, for a failed, non-operating facility, assuming that the entire facility is
sold intact.
Liquidity
The ability to quickly convert an asset to cash.
List Price
The basic catalog price for merchandise.
538
Glossary of Terms
Loan-to-Value Ratio
The percentage a lending institution will loan to the appraised value of a property.
Long-term Liabilities
Liabilities that are not required to be paid within one year.
Low-High Debt – Leasing
Leveraged debt with lower payments earlier in the lease than later in the lease.
Lower of Cost or Market
Generally accepted accounting principle that inventory should be valued at the
lower of the cost to produce it, the cost to repurchase it, or its market value.47
Lower of Cost or Market (Accounting)
The amount that indicates historical cost or market value, whichever is lower.
Lower of Cost or Market (Appraising)
A reflection of current replacement cost or market, whichever is lower. (This differs
from accounting that reflects only on historical cost.)
Lower of Cost or Market (Inventory)
Inventories must be valued at lower of cost or market (replacement cost). Market
cannot exceed the ceiling (net realizable value) or be less than the floor (net realizable
value less a normal markup).48
Lower-of-Cost-or-Market Rule
A method of inventory pricing under which the inventory is priced at cost or mar-
ket, whichever is lower.
Lump Sum
A single price for a group of goods or services where there is no breakdown for the
individual items.
LUST
An acronym for Leaking Underground Storage Tanks.
Machine Tool
Any device, usually stationary, composed of a number of moving parts, at least
partially automatic in action, and operated by power, used for turning, planing, shaping,
milling, drilling, grinding, assembling, or otherwise performing useful work on material.
Machinery
A term encompassing man-made mechanical devices, usually powered, which are
designed to create a product or in some manner alter the state of a material or partial
product.
Machinery and Equipment (M&E)
The physical facilities available for production, including the installation and ser-
vice facilities appurtenant, together with all other equipment designed for or necessary to
its manufacturing and industrial purposes, regardless of method of installation, including
539
Glossary of Terms
all those items of furniture and fixtures necessary for the administration and proper opera-
tion of the enterprise.
Majority Interest
An ownership position greater than fifty percent of the voting interest in an
enterprise.49
Malfeasance
Misfeasance refers to an improper and unlawful carrying out of an act that, if cor-
rectly done, is in itself is lawful and proper, and results in harm to another. Malfeasance
is a related term, but is distinguished by an intention to cause harm by doing an act which
should not be done. Misfeasance is careless or accidental in nature, while malfeasance is
deliberate and knowing. The terms malfeasance and misfeasance are comprehensive terms
and include any wrongful conduct that affects, interrupts, or interferes with the perfor-
mance of official duty.
Manufacturer’s Inventory
The inventory of goods to a manufacturer for the purpose of converting raw mate-
rial to a finished good.
Manufacturing Costs
All costs necessary to make a product.
Margin
Sometimes referred to as hurdle rate; an expected profit on an item or group of
items to the next level of trade. (See markdown.)
Mark-to-Market
A accounting procedure by which assets are recorded at their current market value
which may be higher or lower than their original cost, historical cost or the depreciated
amount that may be shown in accounting records.
Markdown (Inventory)
A monetary or percentage discount from the normal expected price. Also, a de-
crease below original retail price. A markdown cancellation is an increase (not above origi-
nal retail price) in retail price after a markdown.50
Market Analysis
The identification and study of market conditions for a specific type of property.
Market (Market-Based) Approach (Business)
A general way of determining a value indication of a business, business owner-
ship interest, security, or intangible asset by using one or more methods that compare the
subject to similar businesses, business ownership interests, securities, or intangible assets
that have been sold. 51
Market Multipliers
Market-derived multipliers that are applied to a level of earnings to result in an
indication of value.
540
Glossary of Terms
Market Approach
See Sales Comparison Approach.
Market Participants
Buyers and sellers who are independent of and are not related to the entity (or as-
sets) being valued, knowledgeable and have a reasonable level of understanding about the
facts regarding the entity (or assets) being valued, have the legal and financial means to buy
or sell the entity (or assets) being valued and willing buyers or sellers which are motivated,
but not otherwise forced or compelled to buy or sell.
Market Rent
The rent that a property would most probably command in the open market and
indicated by the current rents paid and asked for comparable property as of a specific date.
Market Value
A type of value, stated as an opinion, that presumes the transfer of a property (i.e., a
right of ownership or a bundle of such rights), as of a certain date, under specific conditions
set forth in the definition of the term identified by the appraiser as applicable in an ap-
praisal. Forming an opinion of market value is the purpose of many real property appraisal
assignments, particularly when the client’s intended use includes more than one intended
user. The conditions included in market value definitions establish market perspectives
for development of the opinion. These conditions may vary from definition to definition
but generally fall into three categories: 1. the relationship, knowledge, and motivation of
the parties (i.e., seller and buyer); 2. the terms of sale (e.g., cash, cash equivalent, or other
terms); and 3.) the conditions of sale (e.g., exposure in a competitive market for a reason-
able time prior to sale). Appraisers are cautioned to identify the exact definition of market
value, and its authority, applicable in each appraisal completed for the purpose of market
value (USPAP pages U3–U4).
Market-Value Clause – Insurance
A clause in an insurance policy that provides for a settlement of a claim based on
the market value.
Marketability
The ability to quickly convert property to cash at minimal cost. 52
Marketability Discount
An amount or percentage deducted from an equity interest to reflect the lack of
marketability.53
Marketing Period
The time required to sell a property in the open market subject to specific sale
conditions.
Marking Average (Inventory)
An inventory costing method used in conjunction with a perpetual inventory sys-
tem. A weighted-average cost per unit is recomputed after every purchase. Cost of goods
sold are recorded at the most recent moving average cost.54
541
Glossary of Terms
Markup (Inventory)
The price applied as a percentage above cost. Also an increase above original retail
price. A markup cancellation is a decrease (not below original retail price) in retail price
after a markup.55
Mass Appraisal
The process of valuing a universe of properties as of a given date using standard
methodology, employing common data, and allowing for statistical testing (USPAP page
U-4).
Master Lease
A lease line of credit that allows a lessee to add equipment to a lease under the same
basic terms and conditions without negotiating a new lease contract.
Materials Price Variance
The difference between the actual and standard prices multiplied by the actual
quantity of materials purchased and put into production.
Materials Quantity Variance
The difference between actual and standard quantities of materials used multiplied
by the standard price.
Mean
The arithmetic mean (AM) equals the sum of the variables divided by the number
of items in the group.
Measurement Period
The period of time after the acquisition date during which the acquirer is allowed
to make adjustments to any provisional (or estimated) entries they made in their financial
statements as of the acquisition date.
Mechanic’s Lien
A claim issued in favor of mechanics, contractors, laborers or material suppliers
against a building or other structure.
Median
The median equals the middle number of an array.
Merchandise
Goods that are purchased as finished products and held for resale.
Merchandising System
A system that processes the transactions and events related to a merchandising
business.
Merchant plant
A plant that buys raw materials and sells products in the competitive market at
market rates.
542
Glossary of Terms
Merger
Business combination that occurs when one entity directly acquires the assets and
liabilities of one or more entities and no new corporation or entity is created. Also see:
Consolidation 56
Minimum Investment – Leasing
For a leveraged lease to be a true lease, the lessor must have a minimum “at risk”
investment of at least 20% in a lease when the lease begins, ends, and at all times during
the lease term
Minority Interest
Ownership position less than 50% of the voting interest in an enterprise57.
MISF
See multiple investment sinking fund method.
Misfeasance
Misfeasance refers to an improper and unlawful carrying out of an act that, if cor-
rectly done is in itself lawful and proper, and results in harm to another. Malfeasance is
a related term, but is distinguished by an intention to cause harm by doing an act which
should not be done. Misfeasance is careless or accidental in nature, while malfeasance is
deliberate and knowing. The terms malfeasance and misfeasance are comprehensive terms
and include any wrongful conduct that affects, interrupts, or interferes with the perfor-
mance of official duty.
Mode
The mode equals the number that appears most often in an array.
Modified Accelerated Cost Recovery Schedule (MACRS)
Accelerated depreciation schedule allowed by the federal government for income
tax purposes.
MPRSA
An arrangement for the Marine Protection Resource and Sanitaries Act which ap-
plies to the disposal and incineration of hazardous waste on land and sea.
MSDS
An acronym for Material Safety Data Sheets – The MSDS is a written document
with extensive information on chemical identification, hazards and positive measures.
There must be an MSDS for each hazardous chemical in the workplace.
Multiple
The inverse of the capitalization rate. 58
Multiple Investment Sinking Fund Method – Leasing
A popular method of leveraged lease analysis that breaks down the net cash flows
into non-overlapping investment and sinking fund phases.
543
Glossary of Terms
Multiple Line Insurance

An insurance policy that combines both liability and property damage coverage and
insures against a wide variety of possible losses.
NCP
An acronym for National Contingency Plan which outlines the criteria which must
be applied in the investigation and evaluation of hazardous waste sites, and determination
of proper clean-up response.
Negligence
The omission of something which a reasonable man, guided by those ordinary con-
siderations which ordinarily regulate human affairs, would do, or the doing of something
which a reasonable and prudent man would not do. Negligence is the failure to use such
care as a reasonably prudent and careful person would use under similar circumstances; it
is the doing of some act which a person of ordinary prudence would not have done under
similar circumstances or failure to do what a person of ordinary prudence would have done
under similar circumstances. The term refers only to that legal delinquency which results
whenever a man fails to exhibit the care which he ought to exhibit, whether it be slight,
ordinary, or great. It is characterized chiefly by inadvertence, thoughtlessness, inattention,
and the like, while “wantonness” or “recklessness” is characterized by willfulness. The law
of negligence is founded on reasonable conduct or reasonable care under all circumstances
of particular care. Doctrine of negligence rests on duty of every person to exercise due care
in his conduct toward others from which injury may result. 59
NESHAPS
The Federal Clean Air Act authorizes the EPA to conduct a toxic emissions program
known as NESHAPS.
Net Assets
Total assets less total liabilities60.
Net Assets
Net assets are the result of total assets minus total liabilities.
Net Book Value
With respect to a business enterprise, the difference between total assets (net of
accumulated depreciation, depletion, and amortization) and total liabilities as they appear
on the balance sheet (synonymous with Shareholder’s Equity). With respect to a specific
asset, the capitalized cost less accumulated amortization or depreciation as it appears on
the books of account of the business enterprise. The capitalized cost of an asset less the
depreciation taken for financial reporting (see Book Value).
Net Income
The bottom line of the income statement (also called the profit and loss statement).
Also called profit or net profit, it is equal to income minus expenses. Essentially it is
revenue less expenses and taxes.
544
Glossary of Terms
Net Lease
In a net lease, the rentals are payable net to the lessor. All costs such as taxes,
insurance and maintenance in connection with the use of the equipment are to be paid by
the lessee and are not a part of the rental. Most capital leases and direct financing leases
are net leases.
Net Margin
Revenues less all fixed and variable expenses except for depreciation and interest
expense; a useful level of earnings to test for economic obsolescence.
Net Present Value
The total present value of a time series of cash flows (the time value of money).
Net Operating Income (NOI)
The net income remaining after all operating expenses are deducted from gross
income, but before mortgage debt service and book depreciation are deducted.
Net Realized Value
Selling price less reasonably estimable costs of completion and disposal.
Net Sales
Gross sales less any adjustments for returns, allowances, or discounts taken.
Net Tangible Asset Value
The value of the business enterprise’s tangible assets (excluding excess assets and
non-operating assets) minus the value of its liabilities. 61
Net Worth
The remainder after total liabilities are deducted from total assets.
Nominal Dollars
Current dollars that reflect both real growth and inflation.
Noncash Expense
An expense on an income statement that does not reflect a cash outflow; deprecia-
tion expense.
Nonoperating Assets
Assets not necessary for ongoing operations of the business enterprise; usually held
for investment purposes or as surplus and intended for subsequent disposal. They do not
contribute to the earning capacity of the business entity.
Normal Useful Life (NUL)
The physical life, usually estimated in terms of years, that a new property will
actually be used before it is retired from service. A property’s normal useful life relates to
how long similar properties actually tend to be used, as opposed to the more theoretical
economic life calculation of how long a property can profitably be used. (See Economic
Life.)
545
Glossary of Terms
NPEDS
An acronym for the National Pollutant Discharge Elimination System which gov-
erns permits issued under the Clean Water Act (CWA).
NPL
An acronym for the National Priority List-Priorities sites for clean-up. Each site
receives a numerical score based on analysis of the degree of risk to human health and
environment.
Observable Inputs
Inputs that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from sources independent of the
reporting entity.
Obsolescence
A loss in value due to a decrease in the usefulness of property caused by decay,
changes in technology, changes in people’s behavioral pattern and tastes, or environmental
changes.62
Off Balance Sheet Loan
A type of financing that is used as a true lease for financial accounting purposes and
a conditional sales agreement or loan for tax purposes.
Off-Sites
Facilities required to support the primary process units such as electric power dis-
tribution, water supply, treatment and disposal, tankage, buildings, and fire protection.
On-Hand Supply
Quantity of goods on hand for a given period based on historical sale movement.
Online Auctions
Sales transactions that result from a competitive bidding process conducted over
the Internet.
Open-End Lease
A conditional sale lease in which the lessee guarantees the lessor will realize a
minimum value from the sale of the asset at the end of the lease. If the equipment is not sold
for the agreed residual value, the lessee pays the difference to the lessor. If the equipment
is sold for more than the agreed residual value, the lessor pays the excess to the lessee.
The lease is called an “open-end” lease because the lessee does not know the extent of its
liability to the lessor until the equipment is sold at the end of the lease. The lessee’s liability
is “open-ended.” The term is commonly used in automobile leasing. Individual liability
under open-end leases is limited by consumer protection laws.
Operating Assets
Assets employed in the normal conduct of business operations.
Operating Cycle
The period of time it takes a firm to buy merchandise inventory, sell the inventory,
and collect the cash.
546
Glossary of Terms
Operating Expenses
The total of fixed and variable expenses.
Operating Income
Operating income is a company’s earnings from its core operations after it has
deducted its cost of goods sold and its general operating expenses. Operating income does
not include interest expenses or other financing costs. It also doesn’t include income from
outside activities of the company, such as income on investments.
Operating Lease
Under FAS 13, a lease that does not meet the criteria of a capital lease or direct
financing lease. Generally used to describe a short-term lease whereby a user can acquire
use of an asset for a fraction of the useful life of the asset. The term is used for a lease
in which the lessor provides services, such as maintenance, insurance, and payment of
personal property taxes. The term “operating lease” is derived from short-term leases of
equipment, such as leases for trucks and construction equipment.
Operating Obsolescence
A form of functional obsolescence that is caused by excess operating or manufac-
turing expenses.
Operating Statement
A statement displaying financial operations over a specified period of time; most
frequently an income statement.
Optimal Replenishment system
That amount considered as required for continuing operations in which continuing
depletion would still allow order and replenishment as the last item is sold.
Orderly Liquidation Value (OLV)
An opinion of the gross amount, expressed in terms of money, that typically could
be realized from a liquidation sale, given a reasonable period of time to find a purchaser
(or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a
specific date.
Orderly Transaction and Price
Assumes exposure to the market for a period of time which is “usual and custom-
ary” for similar assets (or liabilities) and which is not a forced liquidation or distressed sale.
Original Cost (OC)
The initial capitalized cost of an asset in the hands of its present owner.
OSHA
An acronym for the Occupational Safety and Health Administration in the United
States.
Overhaul
The act of improving by making repairs, renovations, revisions or adjustments by
renewing and restoring.
547
Glossary of Terms
Own Used Fuel

Energy derived from the raw materials utilized in the process plant but consumed
on site.
Owners
Holders of equity interests of investor-owned entities and owners, members of, or
participants in, mutual entities.
Partial Loss
An insurance term used to describe a loss of less than the entire value of a property
or amount indicated in an insurance contract.
Participation Agreement – Leasing
An agreement between the owner trustee, the lenders, the equity participants, the
manufacturer, and the lessee which spells out the obligations of the parties under the lever-
aged lease. Also called financing agreement.
Partnership
Relationship between two or more persons whereby they agree to carry on a trade
or business for profit and share the resulting profits.
Peer Review
The evaluation of an individual or firm’s practice for compliance with professional
standards.
Per Capita
A Latin term meaning “by head” meaning to be determined by the number of people.
Perceived Value
An individual’s opinion of the value of an item or service to him or her. It may have
little or nothing to do with the true market value or the market price of the item or service,
and depends on the ability of the item or service to satisfy his or her needs or requirements.
Percent of Cost
Establishes the ratio of the sales price (either used or asking, private party or auc-
tion or “public” sale) to the current cost new of the asset at the time of the sale.
Per Curiam
A decision handed down by the court as a whole, without identifying any particular
judge as the author. It is the opinion of the court as a single body.
Per Diem
A Latin term meaning “per day.”
Period Cost
A cost unrelated to the acquisition or manufacture of inventory.
548
Glossary of Terms
Periodic Inventory Method

A method of accounting for inventory under which the cost of goods sold is de-
termined by adding the net cost of purchases to beginning inventory and subtracting the
ending inventory.
Periodic Inventory System (Inventory)
A system of accounting in which purchases and sales of inventory are not recorded
in the inventory account.
Peripherals (Computer)
One of the three basic components of a computer system, the others being Central
Processing Unit (CPU) and Random Access Memory (RAM). The term generally applies
to any device other than the CPU and RAM that is attached to the computer system. Broken
down into three basic categories: A) Input/Output (IO) devices such as printers, keyboards,
and monitors; B) Mass storage devices such as disk drives, hard drives, and tape drives; C)
Communication and Control devices such as modems and soundcards.
Perjury
Perjury is the crime of making a knowingly false statement which bears on the
outcome of an official proceeding that is required to be testified to under oath. A statement
is made under oath when 1) the statement was made on or pursuant to form bearing notice,
authorized by law, to the effect that false statements made therein are punishable, or 2) the
statement recites that it was made under oath, the declarant was aware of such recitation at
the time he made the statement and intended that the statement should be represented as a
sworn statement, and the statement was signed by an officer authorized to administer oaths.
Perpetual Inventory System
A system of accounting for inventory in which the inventory account is respectively
increased and decreased for each purchase and sale of inventory made during the period.
Personal Property
Identifiable tangible objects that are considered by the general public as being
“personal”-for example, furnishings, artwork, antiques, gems and jewelry, collectibles,
machinery and equipment; all tangible property that is not classified as real estate (USPAP
page U-4).
Physical Depreciation
A form of depreciation where the loss in value or usefulness of a property is due to
the using up or expiration of its useful life caused by wear and tear, deterioration, exposure
to various elements, physical stresses, and similar factors. Physical depreciation may be
curable (or partially curable), by replacement or rebuilding, to some percentage of its full
physical life. If curable, the remaining life would go no lower than a core or re-buildable
life. Cure or partial cure may then change the Effective Age of the property. If no re-
placement or rebuilding is economically feasible the physical depreciation will be 100%.
(Sometimes referred to as Physical Deterioration.)
549
Glossary of Terms
Physical Inventory (Accounting)

The act of making a physical count of all merchandise on hand at the end of an
accounting period.
Physical Life
The number of years a new property will physically endure before it deteriorates or
fatigues to an unusable condition purely from physical causes, without considering func-
tional and economic obsolescence.
Plant Specific Obsolescence
A condition within the particular plant that reduces the utility or profitability of the
entire subject property.
Plenary
Characterized by being full and complete in every aspect.
POS (Point of Sale)
A method by which markdowns are only recognized at the register.
Premise of Value
A statement identifying the assumptions, criteria or conditions surrounding the
definition of value under which the appraisal estimate value is being determined.
Present Value (PV)
The value of a future payment or series of future payments discounted to the current
date or time period zero. The current equivalent value of cash available immediately for a
future payment or a stream of payments to be received at various times in the future. The
value, as of a specified date, of future economic benefits and/or proceeds from sale, calcu-
lated using an appropriate discount rate. Current value of a given future cash flow stream,
discounted at a given rate. The value today of something that will be received in the future.
Present Value of an Annuity
The lump sum amount of money that, if invested at a specified rate for a specified
period of time, would generate a certain payment stream over that period of time.
Price
The amount a particular purchaser agrees to pay and a particular seller agrees to
accept under the circumstances surrounding their transaction. Price may not necessarily be
equal to value.
Price Earnings Ratio
The price/earnings ratio (P/E ratio) is one of a number of measures used to assess
the value of a company. The “price” component of the ratio is the stock price of the com-
pany. The “earnings” portion is the net income (income after tax) reported by the company
per share. These two numbers are divided to get a ratio.
Price-Relative Index
This index considers prices or values and may be unweighted or weighted. It is an
average of a series of number, which are “shown as” percentages or indexes.
550
Glossary of Terms
Principal (or Most Advantageous) Market

The market in which the reporting entity would sell the asset or transfer the liability
with the price that maximizes the amount that would be received for the asset or minimizes
the amount that would be paid to transfer the liability, considering transaction costs in the
respective market(s).
Principle of Anticipation
This principle is based on the concept that the buyer of an asset is concerned not
only with the past or present value of an asset but also the future use.
Principle of Substitution
A theory whereby a prudent purchaser would pay no more for a property than the
cost of acquiring an equally desirable substitute in the market.
Product Group
Any group of categories utilized by a company such as a product line.
Product No/Style Code
Identifying codes used to differentiate between different stock keeping units (SKUs)
in an inventory.
Profit and Loss Statement
A financial statement that is a list of income, expenses and net profit (or loss). Also
called an income statement or “P&L.”
Proof of Loss
An insurance term pertaining to a formal submission by an insured to an insurer
containing sufficient data in support of a claim.
Property
The lawful right of ownership of future benefits from tangible and intangible assets.
Any asset, including cash, the title to which is ordinarily transferable between parties.
Proprietary Lease
A lease given by a corporation to another.
Proprietorship
A one owner, unincorporated business.
PRP
An acronym for Potentially Responsible Parties-Parties which are parties identified
by EPA to be responsible for clean-up.
Public Utility Property
As defined in the Internal Revenue code, public utility property includes property
used predominantly in the trade or business of the furnishing or sale of: A) electrical en-
ergy, water, or sewage disposal businesses; B) gas or steam through a local distribution
system; C) telephone services or other communications services if furnished or sold by
COMSAT; or D) transportation of gas or steam by pipeline; if the rates for the furnishing or
sale of any of the above services have been established or approved by a state (or political
551
Glossary of Terms
subdivision), by an agency or instrumentality of the United States, or by a public service

or public utility commission.
Puffery
An exaggeration or statement that no reasonable person would take as factual.
Purchase Discounts
A discount secured by the purchaser of merchandise for prompt payment of invoices.
Purchase Option
An option to purchase lease property at the end of the lease term. In order to protect
the tax characteristics of a true lease, an option to purchase leased equipment from a lessor
by a lessee that is granted at the beginning of a lease cannot be at a price less than its fair
market value at the time the right is exercisable.
Purchase Order (PO)
A document that itemizes the details of merchandise that a purchaser desires to
acquire.
Purchase Price Allocation
The allocation of the purchase price among the various asset categories (both tan-
gible and intangible).
Purchase Option – Leasing
An option to purchase leased property at the end of the lease term in order to protect
the tax characteristics of a true lease, an option to purchase property from a lessor by a
lessee cannot be at a price less than its fair market value at the time the right is exercised.
Purchased/Manufactured Code
Codes used to distinguish manufactured versus purchased raw materials or compo-
nent parts.
Purchasing System
A system that handles the record keeping for acquisitions of merchandise inventory
and ensures that adequate stock levels are on hand to meet demand.
Purpose of the Appraisal
A statement clearly identifying the value(s) to be estimated that are consistent with
the intended use of the appraisal (The purpose should be determined by an appraiser.)
Quantity on Hand
Total units for each stock keeping unit (SKU).
Quantity Survey Method
A procedure used to develop the total cost estimate for materials and labor by es-
timating the quantity and quality of all materials used and all categories of labor hours
required; applying unit cost figures, then adding estimates of owner’s overhead and con-
tractor’s overhead and profit. Also known as detailed estimating.
552
Glossary of Terms
Random Access Memory (RAM)

One of the three basic components of a computer system, the others being CPU (see
Central Processing Unit) and peripherals. RAM is a high-speed storage device used by a
CPU to store and retrieve program instructions and data.
Rate of Return
The rate of return on an investment expressed as a percentage of that investment.
The ratio developed when comparing income or yield to the original investment.
Ratio
The relation of one amount to another expressed as a fraction, integer, or percentage.
Raw Materials (Inventory)
The items to be processed into salable goods.
Raw Material Inventories
Current replacement cost.
Raw Materials Inventory
An inventory account made up of balances of raw material and supplies on hand at
a particular time; also called stores or inventory control account.
RCN
An acronym for Replacement Cost New.
Real Estate
Physical land and appurtenances affixed to the land including buildings, structures,
standing timber, orchards, etc.
Real Property
All interests, benefits, and rights inherent in the ownership of physical real estate;
the bundle of rights with which the ownership of the real estate is endowed. Also known
as Realty.
Redundant Assets
See Non-Operating Assets.
Refurbish
To renew or restore to a new appearance and/or condition.
Related Parties – Leasing
In leasing transactions, a parent and its subsidiaries, an investor and its investees,
provided the parent, owner, or investor has the ability to exercise significant influence over
the financial and operating policies of the related party.
Remaining Economic Life
Estimated period, usually expressed in terms of years, during which property will
continue to contribute value and continue to be profitably used for the purpose for which
it was intended.
553
Glossary of Terms
Remaining Inventory (Accounting)

Beginning inventory at some specific date + Purchases and additions – Sales (at
cost) = Remaining inventory.
Remaining Physical Life
Estimated period during which a property of a certain effective age is expected to
physically endure before it deteriorates or fatigues to an unusable condition purely from
physical causes, without considering the possibility of earlier retirement due to functional
or economic obsolescence.
Remaining Useful Life (RUL)
The estimated period during which a property of a certain effective age is expected
to actually be used before it is retired from service.
Renew
To make new or like new.
Renewal Option (Lease)
An option to renew the lease at the end of the initial lease term. In order to protect
the tax characteristics of a True Lease, an option to renew a lease of equipment from a
lessor by a lessee that is granted at the beginning of a lease must be at a price equal to its
fair rental value at the time the right is exercised. Other renewal option periods are counted
as part of the lease term for guideline purposes.
Renewal Options – Leasing
An option to renew the lease at the end of the initial lease term. Here, care must
be used in granting a renewal option for a fair rental value. If this is not done properly, it
may later be ruled that the lease is not a true lease and the tax advantages may be lost and
tax indemnity clauses activated.
Renovation
The act of being restored to its former good condition.
Repairs
Costs incurred to keep property in good condition but that do not substantially
extend the life or increase the value of a property.
Replacement Cost (Inventory)
The cost to reproduce an inventory item by purchase or manufacture. In lower of
cost or market computations, the term market means replacement cost, subject to the ceil-
ing and floor limitations.63
Replacement Cost New (RCN)
The current cost of a similar new property having the nearest equivalent utility as
the property being appraised, as of a specific date.
Replacements
Costs incurred for making good or whole portions of a property that have deterio-
rated through use or have been destroyed by other causes.
554
Glossary of Terms
Report
Any communication, written or oral, of an appraisal, appraisal review, or ap-
praisal consulting service that is transmitted to the client upon completion of an assign-
ment (USPAP page U-4).
Report Date
The date that the conclusions of value are transmitted to the client.
Reproduction Cost New
The cost of reproducing a new replica of a property on the basis of current prices
with the same or closely similar materials, as of a specific date.
Required Rate of Return
The minimum rate of return that investors will accept before they will commit
money to an investment considering a given level of risk.
Residual
A term that is sometimes used to indicate a value remaining after depreciation on
any asset.
Residual Insurance – Leasing
An insurance policy guaranteeing a certain residual value at the end of the lease
term.
Residual Value
In connection with a tangible asset, the term refers to the value of an asset after
expiration of its normal useful life or the value remaining after part of the property’s life
has been consumed.
Residual Value (Accounting)
The estimated net scrap, salvage, or trade-in value of a tangible asset at the esti-
mated date of disposal; also called salvage value or disposal value.
Residual Value (Appraisal)
Residual value in connection with a tangible asset is the same as salvage value.
Residual Value (Lease)
Lessor’s expected value (usually defined internally by the lessor) of leased equip-
ment at the conclusion of the lease term. The value of leased equipment at the conclusion
of the lease term. To qualify the lease as a “True Lease” for tax purposes, the estimated
residual value of the leased equipment at the end of the lease term must equal at least 20%
of the original cost of the equipment, without regard to inflation. (However, the lessor is not
required to book any residual for financial accounting purposes.) The value as of the end of
the discrete projection period in a discounted future earnings model.
Restoration
The state of being restored or having been restored to its former good condition.
555
Glossary of Terms
Restricted Use Appraisal Report

A written or oral report prepared under Standards Rule 8-2-c-i through xi and ad-
visory opinions 2, 7, 28 and 31 that must contain the following: i) State the identity of the
client by name type and state a prominent use restriction that limits use of the report to the
client and warns that the appraiser’s opinions and conclusions set forth in the report may
not be understood properly without additional information in the appraiser’s workfile; ii)
State the intended use of the appraisal; iii) Describe information sufficient to identify the
property involved in the appraisal; iv) State the property interest appraised; v) state the type
of value, and cite the source of its definition ; vi) State the effective date of the appraisal
and the date of the report; vii) State the scope of work used to develop the appraisal;
viii) state the appraisal methods and techniques employed, state the value opinion(s) and
conclusion(s) reached, and reference the workfile; exclusion of the sales comparison ap-
proach, cost approach, or income approach must be explained; ix) State, as appropriate to
the class of personal property involved, the use of the property existing as of the date of
value and the use of the property reflected in the appraisal; and, when an opinion of the
appropriate market or market level was developed by the appraiser, state that opinion; x)
Clearly and conspicuously: state all extraordinary assumptions and hypothetical condi-
tions; and state that their use might have affected the assignment results; and; xi) include a
signed certification in accordance with Standards Rule 8-3 (USPAP pages U-66 and U-67).
Retail
The sale of goods or commodities usually in small quantities directly to consumers.
Retail Method (Inventory)
An inventory estimation method that derives a cost to retail ratio and applies the
ratio to the total retail value of inventory.
Retained Earnings
Profits of the business that have not been paid to the owners.
Retrofit
To substitute new or modernized parts or equipment for older ones.
Retrospective Appraisal
An appraisal with an effective date prior to the date on which the appraisal was
performed.
Return on Investment (ROI)
Ratio measure of the profits achieved by a firm through its basic operations. The
simplest version is the ratio of net income divided by owners equity.
Revenue Ruling
A written opinion of the Internal Revenue Service requested by parties to a lease
transaction, which is applicable to assumed facts stated in the opinion. Published IRS rul-
ings have general applicability.
Reversion
A lump-sum benefit that an investor receives or expects to receive at the termina-
tion of an investment.
556
Glossary of Terms
Revolver Loan
A loan, typically on receivables or inventory, which moves up or down based on the
balance of some measured value and or other guideline.
Risk
The possibility of loss of principal, lower future income purchasing power, interest
rate variations during the term of the investment, and the failure to attain the periodic and
the residual value forecast.
Risk Factor
The portion of a given return or rate of return from capital invested in an enterprise
that is assumed to cover the risks associated with the particular investment; as distinguished
from, and in excess of, the rate of return obtainable from funds invested where the safety
of principal is virtually assured.
Risk-Free Rate
The rate of return available in the market on an investment free of default risk as of
the valuation date.
Risk Premium
In risk or security analysis, the return over and above the risk-free rate.
Risk Rate
The annual rate of return on capital that is commensurate with the risk assumed by
the investor: the rate of interest or yield necessary to attract capital.
S Corporation
A corporation which, under the internal revenue code, is generally not subject to
federal income taxes.
Safe Harbor Rule
The concept in statutes and regulations whereby a person who meets listed require-
ments will be preserved from adverse legal action.
Safety Stock
That amount of inventory held on hand as backup for future orders that are antici-
pated but not yet committed.
Sale-Leaseback – Leasing
A transaction which involves the sale of the property by the owner and a lease of
the property back to the seller who continues to use the property.
This is one of the three recognized approaches used in appraisal analysis to lead to
an indication of the most probable selling price of a property (also known as the market ap-
proach). This approach involves the comparison of comparable recent sales (or offerings)
of similar assets to the subject. If the comparable sales are not exactly like the subject,
adjustments must be made to the price of the comparable sales (or offerings) to make the
comparables reflect the subject property. The adjustments may be either up or down in
557
Glossary of Terms
order to estimate what the comparable would have sold for if it had the same characteristics
as the subject.
Sale-Type Lease – Leasing
A lease by a lessor who is a manufacturer or dealer in which the lease meets the
criteria definition of a capital lease or direct finance lease.
Salvage Value (SV) (Appraisal)
An opinion of the amount, expressed in terms of money that may be expected for
the whole property or a component of the whole property that is retired from service for
possible use elsewhere, as of a specific date.
Salvage Value (Accounting)
Selling price assigned to retired fixed assets or merchandise unsalable through
usual channels. 64
SARA
An acronym for the Superfund Amendments and Reauthorization Act.
Sarbanes-Oxley Act of 2002 (SOA or SOX)
The Act, H.R. 3763, signed into Law by President George W. Bush on July 30,
2002 to provide protection to the investment community regarding the financial audit and
reporting of public companies. 65
Scatter Diagram
A graph of the relationship between two variables, one independent variable located
on the horizontal (x) axis and the other dependent variable located on the vertical (y) axis.
Scope of Work
The type and extent of research and analyzing in an assignment (USPAP page U-4).
Scrap Value
An opinion of the amount, expressed in terms of money that could be realized for
the property if it were sold for its material content, not for a productive use, as of a specific
date.
Search Engine
Search engines are a resource that provides directories to help locate information
on the Internet.
Section 38 Property
Refers to property described in Section 38 of the Internal Revenue Code, and gen-
erally may be defined as tangible personal property used in a trade or business and located
in the U.S., with certain limited exceptions in the case of aircraft, ships, and offshore rigs.
New Section 38 property is eligible for ITC (see Investment Tax Credit). Only a very
limited amount of used property is eligible for ITC.
558
Glossary of Terms
Self-Contained Appraisal Report

A written or oral report prepared under Standards Rule 8-2-a-i through xi and advi-
sory opinions 2, 28, 29 and 31 that must contain the following: i) State the identity of the
client and any intended users by name or type; ii) State the intended use of the appraisal; iii)
Describe information sufficient to identify the property involved in the appraisal, including
the physical and economic property characteristics relevant to the assignment; iv) State the
property interest appraised; v) State the type and definition of value and cite the source of
the definition; vi) State the effective date of the appraisal and the date of the report; vii)
Describe the scope of work used to develop the appraisal; viii) Describe the information
analyzed, the appraisal methods and techniques employed, and the reasoning that supports
the analyses, opinions, and conclusions; exclusion of the sales comparison approach, cost
approach, or income approach must be explained; ix) State, as appropriate to the class of
personal property involved, the use of the property existing as of the date of value and
the use of the property reflected in the appraisal; and, when an opinion of the appropriate
market or market level was developed by the appraiser, describe the support and rationale
for that opinion;; x) Clearly and conspicuously: state all extraordinary assumptions and
hypothetical conditions; and state that their use might have affected the assignment results;
and xi) Include a signed certification in accordance with Standards Rule 8-3 (USPAP pages
U-62 and U-63).
Server (Computers)
A computer system to provide access to information or Web sites. 66
Short-Term Lease – Leasing
Generally refers to an operating lease.
Shrinkage
Usually a measurement or reserve held for damage and return privileges, theft, or
other losses.
Signature
Personalized evidence indicating authentication of the work performed by the ap-
praiser and the acceptance of the responsibility for content, analyses, and the conclusions
in the report (USPAP page U-4).
Simplified Dollar-Value Method
A small business election under the LIFO method that establishes multiple inven-
tory pools in accordance with general categories of inventory items set forth in applicable
government price indexes, and uses the change in those public published indexes to esti-
mate the annual changes in price for inventory items in the pools.
Sinking Fund – Leasing
A reserve or a sinking fund established or set aside for the purpose of payment
of taxes anticipated to become due at a later date (generally applicable only in leveraged
leases)
559
Glossary of Terms
Sinking Fund Rate

The rate of interest allocated to a sinking fund set aside for future payment of taxes
(generally applicable only in leveraged leases)
Situs
Location or locale of subject.
SLV
An acronym for Stipulated Loss Value.
Soft Costs
See Indirect Costs.
Software
Comprised of the programs, instructions, and routines that make the use of a com-
puter possible. Depending on context, can be both a tangible and intangible asset.
Sole Proprietorship
See Proprietorship.
Special Identification Method
Specific identification method (accounting): Used to identify the cost of each in-
ventory item by matching the item with its cost of acquisition in addition to other allocable
costs such as labor and transportation. (If this method is not used in accounting, one must
elect FIFO or LIFO.)
Special Purpose Property
Property which is uniquely valuable to the owner or which may have been designed
for a limited or special use but may not be of much value to anyone else in its present state.
Specific Identification (Inventory)
An inventory system where the seller identifies which specific items are sold and
which remain in ending inventory.67 This inventory method that requires a business to
identify each unit of merchandise with the unit’s cost and retail until the item of inventory
is sold.
Spreadsheet
An electronic worksheet similar in format to an accounting ledger containing rows
(horizontal) and columns (vertical). Each row is assigned a number while each column is
assigned a letter. The intersection of a row and a column is known as a cell (i.e., A1).
Standard Costing
A procedure used to estimate the original cost of an asset by comparing it with the
known average installed cost of an identical or similar unit at the estimated installation date
of the subject property.
Standard Costs (Inventory)
A unit price, which is predetermined at the time of purchase.
560
Glossary of Terms
Standard of Value
The identification of the type of value being used in a specific engagement; e.g. fair
market value, fair value, investment value, liquidation value, insurable value, et al.
Standard Sinking Fund Method
A method of leveraged lease analysis that assumes all negative cash flows after the
initial investment will be paid out of a hypothetical sinking fund.
Stand-By Capacity
Machinery and equipment purchased in excess of needs so that extra capacity is
available on a stand-by basis during peak usage periods or when other machinery is down
for repair.
Start-Up Costs
Costs, excluding acquisition costs, incurred to bring a new unit into production or
costs incurred to begin a business.
Stock and Trade
Goods held for sales that are displayed at a store or shop.
Stock Keeping Unit (SKU)
A unique numeric or alphanumeric assignment to an item for tracking control or
measurement.
Stores
A typical differentiating term for supplies as referencing repair or replacement
parts, but items not for day-to-day sale.
Straight-Line Depreciation Method (SL)
An accounting method that assumes that depreciation is dependent on the passage
of time and that allocates an equal amount of depreciation to each period of time.
Sublease
A transaction in which leased property is released by the original lessee to a third
party, and the lease agreement between the two original parties remains in effect.
Summary Appraisal Report
A written or oral report prepared under Standards Rule 8-2b-i through xi and ad-
visory opinions 2, 7, 28 and 31 that must contain the following: i) State the identity of the
client and any intended users by name or type; ii) State the intended use of the appraisal;
iii) Summarize information sufficient to identify the property involved in the appraisal,
including the physical and economic property characteristics relevant to the assignment;
iv) State the property interest appraised; v) State the type and definition of value and cite
the source of the definition; vi) State the effective date of the appraisal and the date of
the report; vii) Summarize the scope of work used to develop the appraisal; viii) Sum-
marize the information analyzed, the appraisal methods and techniques employed, and
the reasoning that supports the analyses, opinions, and conclusions; exclusion of the sales
comparison approach, cost approach, or income approach must be explained; ix) State, as
appropriate to the class of personal property involved, the use of the property existing as of
561
Glossary of Terms
the date of value and the use of the property reflected in the appraisal; and, when an opinion
of the appropriate market or market level was developed by the appraiser, summarize the
support and rationale for that opinion; x) Clearly and conspicuously: state all extraordinary
assumptions and hypothetical conditions; and state that their use might have affected the
assignment results; and xi) Include a signed certification in accordance with Standards
Rule 8-3 (USPAP pages U-64 and U-65).
Summary Page
The portion of an appraisal report that summarizes the results of the appraisal.
(Sometimes referred to as an Executive Summary.)
Supplemental Standards
Requirements issued by government agencies, government sponsored enterprises
or other entities that establish public policy which add to the purpose, intent, and content
of the requirements in USPAP, that have a material effect on the development and reporting
of assignment results.
Supplies
Stocks of goods intended to be consumed during the manufacturing or production
process, but not part of the raw materials inventory.
Survivor Curve
A statistical curve showing the number of items within a given group that have
remained in service at regular points in time (usually years).
Take Over
When one entity gains the majority of the shares of another entity, either via a
friendly or hostile means.
Tangible Assets
Physical property such as land, buildings, machinery and equipment, and inventory.
Tangible Personal Property
An asset that maintains all rights that can be transferred to another party and that
can be seen and felt.
Tax
A charge levied by a governmental unit on income, consumption or other basis. 68
Tax Lease
A lease in which the lessor claims tax benefits associated with equipment owner-
ship. Same as a true lease.
TEFRA
An acronym for the Tax Equity and Fiscal Responsibility Act of 1982.
Term – Lease
The period of time during which a lease is in effect.
562
Glossary of Terms
Terminal Value
Sometimes considered salvage or residual value.
Termination Date – Lease
The last day of a lease term.
Termination Value – Lease
Leases sometimes contain provisions permitting a lessee to terminate the lease
during the lease term in the event the leased asset becomes obsolete and/or surplus to the
lessee’s needs. In a True Lease, the asset must be sold or transferred to some third party
unconnected in any way with the lessee. The liability of the lessee in the event of such
termination is set forth in a termination schedule that values the asset at various times
during the lease term. This value is designed to protect the lessor from loss of investment.
If the asset is sold at a price lower than the amount set forth in the schedule, the lessee pays
the difference. In the event the resale is at a price higher than the amount set forth in the
termination schedule, such excess amounts belong to the lessor. The termination schedule
is not the same as the casualty value schedule, insured value schedule, or stipulated loss
value schedule.
Throughput
The total quantity of a process plant’s inputs.
Time Value of Money
The time value of money concept is that a dollar received today is worth more than
a dollar to be received in the future, because the dollar received today can be invested and
earn interest or other benefits. (See Present Value.)
Title
The combination of all elements that constitute proof of ownership.
Total Life
Total life may have three definitions depending on the age and use of an asset: A)
For a new asset, it is the life in years that can be expected; B) For a used asset, it is the
sum of the effective age plus the expected remaining life; and C) For an asset that has been
removed from service, it is the actual number of years the asset was in service.
Total Loss (Insurance)
A loss of the entire value of the property; entails payment of the face amount of an
insurance contract, with an inflation guard provision on the amount, or payment of replace-
ment cost, whichever is lower.
TRA
An acronym for the Tax Reform Act of 1984.
TRAC Lease
A lease with a “terminal rental adjustment clause.” Used in automobile leases to
describe an open-end lease. TRAC leases that otherwise meet True Lease guidelines are
entitled to be treated as True Leases by lessors even though the residual risk is shifted to
the lessee.
563
Glossary of Terms
Trade Fixture
An article that is owned and attached to real property by an owner or a rented space
or building by a tenant and used in conducting a business (also called a chattel fixture).
Trend
A general movement tied to a specific item or group of items in which the move-
ment is up, down, or static.
Trending
A method of estimating a property’s reproduction cost new (not replacement cost
new) in which an index or trend factor is applied to the property’s historical cost to con-
vert the known cost into an indication of current cost. Simply put, trending reflects the
movement of price over time. Also back trending where the historical cost is estimated by
applying a factor to the asset’s reproduction cost (see Indexing).
Triple-Net Lease
Same as a net lease.
True Lease
A true lease is one in which the lessor is the legal owner holding title to the asset
being leased; as such, the lessor has the rights and ownership for tax purposes. Therefore,
a true lease is a transaction that qualifies as a lease under the Internal Revenue Code so
that the lessee can claim rental payments as tax deductions and the lessor can claim tax
benefits associated with equipment ownership such as ACRS/MACRS (see Accelerated
Cost Recovery Schedule/Modified Accelerated Cost Recovery Schedule) depreciation and
ITC (see Investment Tax Credit).
True Lease – Leasing
A true lease typically has a Fair Market Value purchase or renewal option at the end
of the base term. It is sometimes called a True or Tax Lease and is considered a traditional
lease. In the transaction the lessor gives the lessee the right to use specified equipment for
a stated period of time and under specified conditions, such as defined maintenance terms,
in exchange for a fixed series of periodic payments. The lessor remains the owner of the
equipment for tax purposes and the lessee treats the the payments as an operating expense.
At the end of the lease term, the customer has the option to return the equipment to the les-
sor , renew the lease at a Fair Market Value rental rate (negotiable), or purchase the leased
equipment at the then Fair Market Value.
Turns
Number of times an SKU or group(s) of inventory is sold within a given period of
time (Typically, this is expressed in one-year increments.)
UCC
The Uniform Commercial Code. It has been adopted by most states to govern com-
mercial transactions.
564
Glossary of Terms
Uniform Capitalization Rules

These are a set of rules intended to be a single comprehensive set of rules to govern
the capitalization, or inclusion in inventory of direct and indirect cost of producing, acquir-
ing and holding property. Under the rules, taxpayers are required to capitalize the direct
costs and an allocable portion of the indirect costs attributable to real and tangible personal
property produced or acquired for resale. The obvious effect of the uniform capitalization
rules is that taxpayers may not take current deductions for these costs but instead must be
recovered through depreciation or amortization. 69
Uniform Standards of Professional Appraisal Practice (USPAP)
A set of professional appraisal standards established by the Appraisal Standards
Board of the Appraisal Foundation. Developed in 1986–87 by the Ad Hoc Committee on
Uniform Standards, they have been adopted by major appraisal organizations and federal
agencies in North America and are generally recognized as the accepted standards of ap-
praisal practice.
Unit-in-Place Method
Used to develop unit costs for various property components, employing workable
units such as the square-foot, linear-foot, or other appropriate basic unit of measurement,
and applied to recorded unit quantities.
Unit of Measure (UM or UoM)
The indicator of quantity to cost as a basis of measurement.
Unobservable Inputs
Inputs that reflect the reporting entity’s own assumptions about the assumptions
market participants would use in pricing the asset or liability developed based on the best
information available in the circumstances.
Unrecovered Cost
Difference between historical/original cost and the depreciation reserve; synony-
mous with net book value.
Unsalable Goods (Inventory)
Items in an inventory that cannot be sold at normal prices or in the usual way
because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other
similar causes including second-hand goods taken in exchange.
USDOT
An acronym for the United States Department of Transportation which regulates
transportation of hazardous materials at the federal level under the Hazardous Material
Transportation Act.
Useful Life
The period of time over which property may reasonably be expected to perform the
function for which it was designed.
565
Glossary of Terms
Useful Life – Leasing

The period of time during which an asset will have economic value and be useable.
Useful life of an asset is sometimes called the economic life of the asset. To qualify as
a true lease, the leased property must have a remaining useful life of 20% of the original
estimated useful life of the leased property at the end of the lease term, and at least a life
of one year.
UST
An acronym for Underground Storage Tanks.
Utilization
The actual operating rate of a plant compared to its normal or designed operating
rate.
Valuation
The act or process of valuing.
Valuation Date
See Appraisal Date.
Valuation Method
One of the three specific approaches to determine value. See Cost Approach, Sales
Comparison Approach and Income Approach.
Valuation Procedure
See Appraisal Procedure.
Value
The monetary relationships between properties and those who buy, sell or use those
properties (USPAP page U-4).
Value in Use - Financial
The present value of the future cash flows expected to be derived from an asset or
a cash generating unit. Also see In Use and In Continued Use.
Variable Costing
See direct costing.
Variable Operating Costs
Those elements that contribute to operating obsolescence.
Weighted-Average Cost (Inventory)
Weighting the units in the beginning inventory of a product and in each purchase of
the product by the number of units in the beginning inventory and in each purchase, which
determines a weighted average cost per unit of the product.
Weighted Average Cost of Capital (WACC)
The weighted average cost of capital (WACC) represents the after-tax return on the
elements of the invested capital of the business, weighted by their relative percentage of
the total invested capital. The WACC is made up of the cost of equity and the cost of debt.
566
Glossary of Terms
Weighted Average Method (Inventory)

A method of accounting for inventory that computes a weighted-average cost for
goods purchased or manufactured.
Weighting
The relative importance or impact made by items collectively or by quantity (All
items are not of equal importance.)
Wholesale
The sale of goods in large quantities, as for resale by a retailer. 70
Word Processing
An electronic system that rapidly processes the text of letters, reports, etc.
Workfile
Documentation necessary to support an appraiser’s analyses, opinions, and conclu-
sions (USPAP page U-5).
Work-in-Process (Inventory) (WIP)
The inventory of goods started but not completed.
Work in Process Inventories
Estimated selling price less the sum of the costs of completion, costs of disposal
and a normal profit.
Working Capital
The amount by which current assets exceed current liabilities.
Year-to-Date Sales/Usage
Total units sold/used year to date for each product/style code.
Yield
The actual rate of return on an investment including any excess or deficit over the
original capital investment at the end of the investment period. The interest rate earned by
the lessor or equity participant in a lease, which is measured by the rate at which the excess
cash flows (including tax benefits) permit recovery of investment [It is the rate at which
the cash flows (including tax benefits) not needed for debt service or payment of taxes
amortize the investment of the equity participants. Yield is expressed on a pretax basis but
is computed on an after-tax basis. A lease yield is computed differently from ROE.]
Note: All references to USPAP, the Uniform Standards of Professional Appraisal Practice
and Advisory Opinions are from the January 1, 2010 through December 31, 2011 edition,
the Appraisal Foundation, 1029 Vermont Ave. N.W., Suite 900, Washington, DC 20005-
3517. All references to GAAP are from GAAP 2005: Interpretation and Application of
Generally Accepted Accounting Principles, Hoboken, NJ: John Wiley and Sons, Inc., 2004.
All references to IVS are from the International Valuation Standards, 2003, sixth edition,
International Valuation Standards Committee, 12 Great George St., London, United
Kingdom SW1P3AD, ISBN: 0-922154-75-9.
567
Glossary of Terms
Notes
1
NYSSCPA
3 Park Ave., 18th Floor
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
2
Ibid
3
Ibid
4
International Risk Management Institute, Inc.
12222 Merit Drive, Suite 1450
Dallas, TX 75251-2276
(972) 960-7693; fax (972) 371-5120
http://www.irmi.com/default.aspx
5
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
6
Sarbanes & Oxley Terms and Definitions; www.markgengozian.com
7
Small Business Taxes and Management
www.smbiz.com
8
International Valuation Standards (IVS)
2003, sixth edition, International Valuation Standards Committee
12 Great George Street, London SW1P 3AD, United Kingdom
Phone: +44 (0) 1442 879 306
ivsc@ivsc.org
page 369
9
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
10
Ibid
11
Ibid
12
The International Glossary of Business Valuation Terms
GAAP 2005: Interpretation and Application of Generally Accepted Accounting Principles
13
Hoboken, NJ: John Wiley and Sons, Inc., 2004, page 220.
14
Business Owners Toolkit
2700 Lake Cook Rd
Riverwoods, IL 60015
www.toolkit.com/small_business_guide/
15
Hoboken, NJ: John Wiley and Sons, Inc., 2004, page 220
16
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
17
18
Ibid
19
Forensic and Valuation Services
(888) 777-7077
http://fvs.aicpa.org
20
568
Glossary of Terms
21
FASB Statement No. 157, Fair Value Measurements, paragraph 5
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116
Telephone: (203) 847-0700
Fax: (203) 849-9714
22
Statement of Financial Accounting Standards No. 141
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116
(203) 847-0700; fax (203) 849-9714
23
24
25
Hoboken, NJ: John Wiley and Sons, Inc., 2004,

26
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
27
Ibid
28
29
Ibid, page 220
30
31
Hoboken, NJ: John Wiley and Sons, Inc., 2004

32
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
33
34
Ibid
35
Forensic and Valuation Services
(888) 777-7077
http://fvs.aicpa.org
36
37
Ibid, page 221
38
Ibid, page 221
39
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
Small Business Taxes and Management
40
www.smbiz.com
41
42
Ibid
43
Ibid
44
Ibid
569
Glossary of Terms
45
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
46
Ibid
47
Dictionary of Finance and Investment Terms
48
49
Phone: +44 (0) 1442 879 306
ivsc@ivsc.org
page 419
50
51
52
Ibid
53
Phone: +44 (0) 1442 879 306
ivsc@ivsc.org
page 423
54
55
Ibid, page 214
56
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
57
Phone: +44 (0) 1442 879 306
ivsc@ivsc.org
page 424
58
59
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
60
Phone: +44 (0) 1442 879 306
ivsc@ivsc.org
page 425
61
62
Phone: +44 (0) 1442 879 306
ivsc@ivsc.org
page 429
570
Glossary of Terms

63
64
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
65
66
My Own Business Inc.
13181 Crossroads Parkway North
Suite 190
City of Industry, CA 91746
(562) 463-1800; fax (562) 463-1802
www.myownbusiness.org/business_glossary.html
67
68
NYSSCPA
New York, NY 10016-5991
(212) 719-8300; fax (212) 719-3364
www.nysscpa.org
69
Ibid
70
www.thefreedictionary.com
571
Index
A
AC. See Alternating current
Accelerated Cost Recovery Schedule, 502
Accounting Depreciation, iv, 13, 390
accelerated depreciation, 172–182, 372–377, 391–392, 441–449
accounting concept of depreciation, 13–22
compared with valuation concept, 21
defined, 13
double declining, 390
double declining balance method, 390
units of activity, 390
Accounting Principles Board Opinions on fair market value allocation, 18
Accounts and classes for machinery and equipment, 25, 37
Accredited Member, 264
Accredited Senior Appraiser, 264
Accrued depreciation, 12, 58, 517
Acquisition date, 542
ACRS. See Accelerated Cost Recovery Schedule
Actual Cash Value by insurance appraisals, 19, 503
Additional risk premium, 128–150
Ad valorem tax, 289, 299–304, 503–571
Advocacy, defined, 503
Advocate, defined, 258
Age/Life Analysis, 503
Age/life ratio, 61–92
572
Age/Life ratio of physical deterioration, 60–69
Age (of equipment), 35, 503
Aircraft
Abbreviations, 330–333
Acronyms, 330–333
Appraisal, 321–333
Assets, 322
Inspections, 324
inventory, 323–333
Purpose and Use of the Appraisal, 323
Types and Categories of Aircraft, 321
Vocabulary, 330–333
Algebraic Equations, 432–438
Allocation of Purchase Price, 504
Alternate Use, 10
Alternating current, 27
AM. See Accredited Member
American Society of Appraisers, 211
recertification, 217
report standards, 198
website, 206
Amortization, 504
Annuity, 122, 401–404, 504
Apple, 344
Apple systems, applicability to, 344
Application software, 339, 353
Appraisal
allocation of purchase price, 18
573
Bankruptcy, 18
conclusion of value, 17
condemnation, 18
consulting, defined, 260, 515
date, 505
defined, 9, 258
depreciation, defined, 56, 89, 517
depreciation, types of, 56, 89
dissolutions, 19
effective eate, 17
ethics, 256–266
fees, 257, 264, 265
financing, 19
insurance, 19
intended uses, 16
leasing purposes, 275–287
lenders, 299–303
limiting conditions, 17
loss settlement, 19
management, 20
marine asset, 305–320
preparing report, 17, 197–231
previous, 265
property, 16
purposes of, 16, 18
relevant data, 17
report, 17, 197–231, 555
review, 505
574
taxation, 20
valuation methodology, 17
value premises, 10, 12
Appraisal Foundation, 197, 444
Appraisal Profession Online, 345
Appraisal Standards Board, 259, 444
Appraisal Subcommittee, 440
Appraiser
defined, 505
licensing of, 445
peers, 505
qualifications of, 211
Appraiser Qualifications Board, 444
Appraiser Update, 445
Appreciation, 505
Approaches to value
cost, 13, 21, 39–92
income, 13, 21, 120–150
sales comparison, 13, 21, 93–119
AQB. See Appraiser Qualifications Board
ARPAnet, 345
ASA. See American Society of Appraisers
ASAs. See Accredited Senior Appraiser
ASB. See Appraisal Standards Board
ASC. See Appraisal Subcommittee
As-is, Where-is, 506
Assets
appropriate value of, 134
575
defined, 506
terminal value of, 134
Assignment, defined, 506
Assignment Results, 506
Assumed Earnings, 506
Assumption, 506
Assumptions and Limiting Conditions, 506
Average Cost Method, 507
Avis, 274
B
Balance Sheet, 507
Band of investment. See Weighted average cost of capital
Bank Holding Company Act,, 269
Bankruptcy, value appraisal for, 18, 21
Bargain Renewal Option, 507
Base Term, 508
Base Year, 508
Bata factors, 129, 142–150
Beginning Inventory, 508
Betterment, 508
Bias, 508
Bills, Treasury, 128
Black, James, 51
Bond Guide, 141
Bond ratings, 127
Bonds, Treasury, 128
Book life of assets, 14
Brand name of equipment, 35
576
Broker databases, 343
Build-up method, 127
Business Enterprise
components, 147
defined,, 135, 509
Business ethics, 256
C
CA. See Current assets
CAD. See computer-aided design
Capacity for use. See Continued use
Capacity of equipment, 35, 96
CAPEX. See Future capital expenditures
Capital
asset, 510
asset pricing model method, 129, 149
excess cost, 40, 90
lease, 510
structure analysis, 141
weighted average cost of, 125
working, 145
Capitalization, defined, 511
Capitalization rates, 123, 135, 511
CAPM. See Capital asset pricing model method
Cash Flow Statement, 511
Casualty value, 512
CD-ROM drive, 335
CDs. See Compact disk
Central processing unit, 334, 512
577
Certification of appraiser, 512
Certification of disinterest, 211
CGA. See Color graphic monitors and adapters
Charitable contributions, value appraisal for, 20
Chronological age, defined, 61, 512
CL. See Current liabilities
Class, 512
Classification and description of machinery and equipment, 23–38
computer equipment, 31
construction in Progress, 31
foundations and structural supports, 36
general plant equipment, 29, 37
laboratory and test equipment, 31
leased, 31
material handling and storage equipment, 29
motor control center (MCC), 25
nonoperating assets, 32
not inspected, 32
office equipment, 25
power wiring, 28
process piping, 28
production machinery, 25
rolling stock, 30
special classes, 31
support equipment, 26
switchgears, 26
tools, 31
Client profiles, 343
578
Coinsurance, 513
Coinsurance clause, 19, 513
Collateral, value appraisal of, 19
Color graphic monitors and adapters, 336
Commencement date, 513
Compact disk, 335
Comparable match technique, 98
Comparable sales and adjustments, 95
elements of comparability, 96
techniques, 98
Comparative sales method, 513
composite physical remaining life, 66
Compounding, 514
Compound interest, 393, 514
Comptroller of the Currency, 269
computer-aided design, 31
Conclusion of value, 17
Condemnation, 514
value appraisal for, 18
Conditional sales agreement, 273
Condition of equipment, 96
definitions of, 57
Confidential information, 514
Conforming leases, 272
Consignments, 514
Constant dollar accounting, 515
Construction in progress, 31
Consulting, defined, 9
579
Continued use, 10, 21
Continued use property
fair market value of, 10, 11, 36, 103, 523
Conversion factors, 408
Corporation dissolution, value appraisal for, 19
Correlation, 515
Cost
center, 516
defined, 12, 21, 515
depreciation, 56
determining cost new, 43
determining replacement cost new, 39
determining reproduction cost new, 39
hard, 280
index, 50, 63
original, 14, 547
soft, 280
Cost and reference libraries, 45
Cost Approach, 39
aircraft, 322
commercial vessels, 309
Costing, 516
Cost new determination
cost-to-capacity method, 51, 76, 88, 90
detail method, 43
hand factor method, 55
Lang factor method, 55
trending method, 43, 50, 88
580
Cost of Capital: Estimation and Applications, 150
Cost of debt, 127
Cost of equity, 127
analysis, 142
build-up method, 127
capital asset pricing model method, 129
Cost of goods sold, 138
Cost survey specialty, 356
Cost-to-Capacity Method, 51, 76, 88, 90
CPU. See Central processing unit
Crane v. Commissioner, 269
Curable Depreciation, 516
Curable physical deterioration, 67
Current assets, 516
Current liabilities, 516
D
Database, 516
Database software, 342
DC. See Direct current
DCF. See Discounted cash flow method
Dealer databases, 343
Debt, cost of, 127, 141
Debt-free net cash flow, calculating, 140
Default, 517
Deflation, 517
Depreciable cost, defined, 14, 517
Depreciable life of assets, 14
Depreciated replacement cost, 517
581
Depreciation
accounting, 14, 21, 390, 517
accrued, 503
accumulated, 13
appraisal, 86, 517
declining balance method, 517
defined, 13, 21
economic obsolescence, 57, 89
functional obsolescence, 56, 89
of assemblage costs, 104
physical deterioration, 57, 89
rate, 518
sequence of, 86
straight line method, 518
sum of the years digits method, 518
types or causes of, 56
valuation, 13, 21
Desktop computers, 337
Detail Method, 43, 89
Dies, classification of, 31
Digital video disks, 335
Direct
cost, 44
costing, 518
cost method, 46
current, 27
dollar measurement, 67, 519
lease, 519
582
match technique, 98
materials, 519
Direct capitalization approach, 135, 149, 518
Discounted cash flow method, 135, 138, 519
Discounting, 121, 148, 519
Discount rate, 123, 124, 140, 519
Discount rate derivation, 140
Disinterest certification, 211
Disk operating system, 519
Dissolutions, value appraisal for, 19
DOS. See Disk operating system
DVDs. See Digital video disks
E
Earnings before interest, taxes, depreciation, and amortization (EBITDA), 139
Economic obsolescence
defined, 57, 76, 89, 520
inutility measurement, 77
Economic useful life, defined, 62, 520
Effective age
calculating, 62, 96
defined, 61, 520
Effective date, 520
ELA. See Equipment Leasing Association of America
Electronic mail, 345, 520
E-Mail. See Electronic mail
Eminent domain power, 18, 521
Ending inventory, 521
Equipment
583
computers, 31
leased, 31
office, 31
plant, 29
storage, 29
Equipment leasing. See Leasing equipment
Equipment Leasing Association of America, 270
Equipment World, 99
Equity
cost of, 127, 142
risk premium, 130
Estates, 521
Estate taxes, value appraisal for, 20
Estimate, 521
Estimated remaining life, 61
Estimated Remaining Useful Life, 521
Estimated residual value, 134
Estimated Residual Value of Leased Property, 521
Ethics, 256
advocacy, 263
appraisal, 258
appraiser’s responsibility, 259
business, 256
criticism of another appraiser, 257
defined, 256
disclosure of previous appraisal clients, 257, 258, 260
ethic requirements, 259
Ethics Resource Center, 257
584
fee issue, 257, 259
inexperience issue, 257, 258
personal, 256
subsequent purchase of equipment and, 262, 263
Uniform Standards of Professional Appraisal Practice requirements, 259,
262
Examination method of identification, 37
Excess capacity, 522
Excess capital cost, 40, 70, 71, 72, 89, 522
Exclusion, 522
Expenses, 14
External obsolescence, 76
Extraordinary assumption, 522
F
FAA. See Federal Aviation Administration
Factoring, 32
Fair market value
allocation of purchase price, 18
continued Use, 10, 21, 28, 29, 104, 523
defined, 10, 522
for production lines, 110
individual units, 98
industrial facility, 111
installed, 11, 28, 103, 111, 114, 523
inventory, 289
removed, 10, 110, 523
Fairplay, 311
Fair rental value calculation, 283
585
FARs. See Federal Aviation Regulation
FASB. See Financial Accounting Standards Board
FDIC. See Federal Deposit Insurance Corporation
Feasibility analysis, 524
Federal Aviation Administration, 321
Federal Aviation Regulation, 321, 330
Federal Deposit Insurance Corporation, 440
Federal Financial Institutions Examination Council, 440
Federal License Requirements, 445
Fee simple estate, 524
Fellow, 264
Fiduciary, defined, 258
FIFO. See First-in, first-out method
Financial Accounting Standards Board, 524
statement, 276
Financial Institutions Reform Recovery and Enforcement Act, 440
Financial tables, 396
Financing
agreement, 524
Finished goods, 525
FIRREA.. See Financial Institutions Reform Recovery and Enforcement Act
First-in, first-out method, 298, 525
Fixed assets, 14, 525
Fixture, 31, 525
Flat-file, 342
Floor, 525
Flowline, 24
586
FLV. See Forced liquidation value
Forced liquidation value, 11, 111, 526
Formula/ratio method and physical deterioration, 89
Formulas, 427
Foundations, classifications of, 29
Free cash flow, 140
Full absorption, 526
Functional obsolescence
defined, 56, 70, 89, 526
from excess capital costs, 71, 90
from excess operating expenses, 71, 90
Fundamental mechanics, 434
Future capital expenditures, 139, 145
Future value, 122, 527
G
GAAP. See Generally accepted accounting principles
Generally accepted accounting principles, 14, 289, 527
General plant equipment, classification of, 29
Genuine leases, 272
Geometry formulas, 427
Gift taxes, value appraisal for, 20
Glossary of terms, 502–571
Going concern, 527
Goods in transit, 527
Goodwill, 528
Graphical user interface, 336, 339
word processors, 340
Gross
587
book, 528
cash flow, 139
margin, calculating, 138
profit, 528
sales revenues, 138
GUI. See Graphical user interface
Guideline companies, 141
H
Hand factor method, 55
Hard disk drives, 335
Hardware, computers, 334, 528
HDDs. See Hard disk drives
Hertz, 274
Highest and best use analysis, 210, 529
High memory areas, 338
Historical costs, 50, 63, 529
Historical operating statements, 138
Horsepower, 27
HP. See Horsepower
Hypothetical condition, 529
I
Ibbotson Associates, 128, 131, 143
IBM, 334
ICN. See Insurance cost new
Identification of equipment
abbreviated, 37, 38
sampling, 37
IMO. See International Maritime Organization
588
Income approach, 120–150
aircraft, 322
application of, 134
capitalization rates, 120
capital structure analysis, 141
commercial and yacht, 316
cost of debt, 127
cost of equity analysis, 142
defined, 13
direct capitalization approach, 135
discounted cash flow, 138
discount rate, 124
discount rate derivation, 140
limitations of, 120
present value of future benefits, 121
rates of return, 126
steps involved, 132
time value of money, 121
weighted average cost of capital, 125
Income statement, 530
Income tax
life of the assets, 14
Incurable depreciation, 67, 530
Incurable deterioration, 67
Indexing, 50, 63, 65, 531
Indirect costs, 44, 531
Individual units
589
appraisal, 98
fair market value, 103
liquidation value, 99
Industrial facilities, 112
Inflation, 532
Initial term, 532
Installed property
fair market value, 11, 27, 103, 111
Insurable value, 532
depreciated, defined, 12, 532
Insurance
cost new, defined, 12
policies, appraisal for, 19
Intangible assets, 532
Intel, 334
Intended use, 533
Intended user, 533
Interest, 533
Interest, compound, 393
Internal rate of return, 533
Internal Revenue Act, 269
Internal Revenue Code, 18
Internal Revenue Service
rulings for leases, 271
International Maritime Organization, 314
Internet
defined, 344, 533
590
services, 345
sites, 353
Inutility and measuring economic obsolescence, 78
inutility penalty, 77, 79
Inventories, classification and appraisal of, 32
Inventory, 288
ad valorem tax, 289
aircraft, 330
build-out, 302
ceiling, 512
cost, 534
defined, 289, 533
direct (variable) costing, 519
first-in, first-out, 298, 525
layer, 534
LIFO, 298, 537
line-item testing, 293
marking average, 541
on-site, 290
orderly liquidation value, 299, 300
raw materials, 553
replacement cost, 294
requirements, 290
retail method, 298
sample counting, 303
specific identification, 560
standard costs, 560
turnover, 534
591
uses, 289
weighted-average, 566
work-in-process, 293, 567
Invested capital, defined, 125
Investment tax credit, 534
Iowa curves, 534
IRR. See Internal rate of return
IRS. See Internal Revenue Service
ITC. See Investment tax credit
Item-by-item method, 535
IVD. See Insurable value depreciated
J
Jelen, Frederic, 51
Jigs, classification of, 31
Jurisdictional exception, 535
K
Kaufman, Richard, 448
Keyboard, 336
Kilowatt, 27
L
Laboratory equipment, classification of, 31
Land improvements
life of assets, 14
recording costs, 14
Lang factor method, 55
Last in, first out Method, 298, 535
conformity rule, 537
liquidation, 537
592
reserve, 538
retail, 538
LCD. See Liquid crystal display
Leased equipment, classification of, 31
leasing
versus renting, 267
Leasing, 267
appraisal, 275
defined, 267, 536
distinguishing from renting, 267
end of lease, 277
history of, 268
intended as security, 273, 536
lease schedule, 536
lease structures, 271
lessees and lessors, 268
off balance sheet loans, 274
period, 276
purchase options, 278
renewal options, 278, 554
residual forecasting, 279
residual value, 279, 555
terms, 276, 536
transaction criteria, 272
Lend-Lease Act, 269
Lessees, 268, 285, 536
benefits of, 272
Lessors, 268, 285, 536
593
Level of trade, 297, 303, 537
Leveraged leases, 277, 537
Libraries, cost and reference, 45
Licensed vehicles, classification of, 30
Licensing of MTS appraisers, 439–449
Appraisal Foundation, 440
origins and history of, 439
Life determination and measuring physical deterioration, 57
Life of assets, 14
LIFO. See Last in, first out Method
Limited appraisals, 38
Limited use property, 538
Liquidation
appraisals, 18
defined, 19, 538
forced, 11, 111
in place, 11, 538
of individual units, 99
orderly, 11, 110
value, 18
Liquid crystal display, 336
Listings for machinery and equipment, 23
Loss settlements, value appraisal for, 19
Lotus, 344
Lower of cost or market, 294, 539
LVIP. See Liquidation value
M
Machinery and equipment. See also Equipment
594
abbreviated analysis, 37
accounts, 25, 37
classes, 25, 37
classification and description, 25
computers, 31
defined, 539
identification and listing, 32
leased, 31
macroidentification of, 32, 37
microidentification of, 34, 37
office, 31
plant, 29
reference sources, 481
sampling, 37, 38
storage, 29
visuals, 24
Machinery and technical specialties. See Technical specialities
accreditation checklist, 206
appraisers, licensing of, 439
premises of value, 10
report checklist, 206
Machine Tool, 539
MACRS. See Modified accelerated cost recovery system
Majority interest, 540
Management considerations, value appraisal for, 18
Marginal cost, 127
Marginal returns, 126
Marine asset appraisal, 305
595
condition and valuation survey, 317
cost approach, 306
economic obsolescence, 309
equipment types, 305
factors, 310
forced liquidation value, 316
functional obsolescence, 312
income approach, 316
income-producing, 309, 318
limitation of liability, 317
non-income-producing, 306, 318
orderly liquidation value, 316
physical depreciation, 308
pleasure craft, 305
resources, 319
sales comparison, 307
sales comparison approach, 315
salvage value, 134, 316
scrap value, 316
values, 316
yachts, 305
MarineLog, 311
Markdown, 540
Marketability discount, 541
Market analysis, 540
Market approach. See Sales comparison approach
Marketing period, 541
596
Market rent, 541
Market value, 541
Markowitz, Harry M., 129
Markup, 542
Marriage dissoulution, value appraisal for, 19
Mass appraisal, 542
Master lease, 542
Master pricing databases, 343
Material handling equipment, classification of, 29
MCC. See Motor control centers
Measurement tables, 405
Mechanical formulas, 434
Microsoft, 344
Access, 344
Excel, 344
Windows-based software, 339
Word, 344
Miller, Merton H., 129
Minority interest, 543
Model number of equipment, 35
Modems, 338
Modified accelerated cost recovery system, 15, 543
Monitors, computer, 336
Monthly Bond Guide, 141
Moody’s, 142
Morality, defined, 256
Motor control centers, 25
Mouse, computer, 336
597
MTS. See Machinery and technical specialties
Multiple-period model, 149
N
Narrative reports, 198
National Banking Act, 269
National registry of state licensed and certified appraisers, 440
Net assets, 544
Net book value, defined, 14, 544
Net cash flow
calculating, 140
debt-free, 140
Net income
calculating, 139, 145
defined, 544
Net operating income, 545
Net realizable value, 18
Newsline, 448
New York Plan, 268
NOI. See Net operating income
Nominal weights, 437
Nonoperating assets, defined, 32, 545
Normal useful life, defined, 61, 545
Notebook computers, 338
Not inspected assets, defined, 32
NUL. See Normal useful life
O
Observation method of measuring physical deterioration, 59, 89
OBSLs. See Off balance sheet loans
598
Obsolescence
defined, 546
economic, 57, 76, 89
functional, 56, 89
operating, 71
remaining, 80
OC. See Original cost
Occupational Safety and Health Administration, 547
Off balance sheet loans, 274, 546
Office furniture, fixtures, and equipment, classification of, 31
Oil and gas specialty, 356
Online services, 344
Open-end lease, 546
Operating
assets, 546
cost, excess, 56, 89
expenses, 145
income, calculating, 145
leases, 269, 547
obsolescence, 71, 547
statement, 547
Oral reports, 205
Orderly liquidation value, 11, 110, 547
Original cost, 14, 547
OSHA. See Occupational Safety and Health Administration
P
Paired sales technique, 102
Partial loss, 548
599
Participation agreement, 548
Partnership dissolution, value appraisal for, 19
Pentium processor, 334
Percentage of cost technique, 114, 116
Periodic inventory method, 549
Peripherals, 549
Perishable tools, classification of, 31
Permanent tools, classification of, 31
Perpetual inventory system, 549
Personal computers, 334
application software, 339
case study, 351
configuration, 338
database software, 342
desktop computers, 337
hardware, 334
internet sites, 353
need for, 334
notebook computers, 338
online services, 344
purchasing, 338
software, 339
Personal ethics, 256
Personal property, 549
Philadelphia Plan, 268
Physical deterioration
age/life formula, 60
curable and incurable, 67
600
defined, 56, 57
description, 57
direct dollar measurement, 58
estimating, 59
measuring, 59, 89
observation method, 59, 89
sources of information, 69
use/total use formula, 60
Physical inspection, 291
Physical inventory, 550
Physical laws, 433
Physical life
calculating, 65
defined, 61, 550
Physical size of equipment, 35
Pixels, 350
Plane figures, 427
Plant vehicles, classification of, 30
PO. See Purchase order
Power wiring, classification of, 28
Pratt, Shannon, 150
Premise of value, 10, 94, 550
Present value, 121, 550
Present value of future benefits, 121
Price, defined, 12, 21, 550
Pricing guides, 323
Principle of substitution, 551
Principles of Appraisal Practice and Code of Ethics, 262
601
Process piping, classification of, 28
Production bottlenecks, 109
Production lines
fair market value, installed, 110
fair market value, removed, 110
forced liquidation value, 111
in continued use, 108
liquidation value, 111
orderly liquidation value, 110
Production machinery, classification of, 25
Proof of loss, 551
Property, 551
tax, value appraisal for, 20
Publications, 450
Public utility
property, 551
specialty, 357
Published prices, 450
Purchase
option, 552
order, 552
Q
Quantity survey method, 552
Quattro Pro, 344
R
RAM. See Random access memory
602
Random access memory, 336, 553
Rate of return, 123, 148, 553
Ratio, 553
Raw materials, 553
RCN. See Replacement cost new
RCNLD, 82
Read only memory, 335
Real estate appraisers, licensing of, 439
Real property, 553
recertification statement, 264
Recommended readings, 471
Record keeping requirements, 205
Reference library, 45
Reference sources
accounting, 471
agriculture, 450, 471
appraisals, 450, 472
audiovisual, 452, 474
automotive, 452, 474
aviation, 453, 474
business, 475
communications, 455, 476
construction, 457, 476
electronics, 477
energy, 478
engineering, 459, 479
environmental, 460
healthcare, 460, 480
603
lending, 461, 480
machinery and equipment, 462, 481
maritime, 468, 485
metalworking, 488
mining, 469, 489
miscellaneous, 470, 490
oil and gas, 470, 491
printing, 470
railroad, 492
rubber and plastics, 493
technology, 495
Reference tables, 405
Relational database programs, 342
Remainging obsolescence factor, 80
Remaining economic life, 62, 553
Remaining physical life, 61, 554
Remaining useful life, 61, 554
Removal of property
fair market value, 19, 110
production lines, 110
Renting equipment, 267
Replacement cost, 294, 554
Replacement cost new, 39, 554
Reporduction cost new, 39, 555
Report, defined, 555
Report writing, 197
aircraft, 323
appraisal/premise of value, 209
604
approaches to value, 210
appropriate market, 225
asset inventory, 209
content considerations, 208
disinterest certification, 211
dissenting opinions, 204
effective date, 208
form report, 212
forms of, 198
highest and best use analysis, 210
letter of transmittal, 209
limiting conditions, 211
methodology, 222
narrative report, 198
oral reports, 205
organization, 208
property identification, 208, 209
purpose, 208, 209
qualifications of the appraiser, 211
requirements, 197
rules, 198
standards, 198, 205
style of, 208
summary, 209
table of contents, 208
title page, 208
Residual forecasting, 279
Residual value
605
defined, 279, 555
of equipment, 149, 268, 279
Restricted use appraisal report, 198, 556
Retrospective appraisal, 556
Return on investment, 556
Revenue ruling, 556
Reversion, 556
Risk, 557
factor, 557
premium, 557
rate, 557
ROF. See Remaining obsolescence factor
Rolling stock, classification of, 30
ROM. See Read only memory
RUL. See Remaining useful life
Rules for report writing, 198
S
Sale and leaseback, 557
Sale for removal, 10, 21
Sales comparison approach, 93
adjustments, 93, 95
appraising a group of assets, 104
appraising an industrial facility, 111, 116
commercial vessels, 311
comparable sales, 95
defined, 13, 557
elements of comparability, 96
fair market value, individual units, 103
606
fair market value, productions lines, 105
forced liquidation value, production line, 111
identification of subject property, 94
liquidation value, individual units, 99
liquidation value in place, production lines, 111
methodology, 112
orderly liquidation value, production lines, 110
premises of value, 94
techniques of comparison, 98
whole plant approach, 112, 113
Sales revenue, 138
Salvage value, 12, 134, 558
Sampling technique, 37
Sarbanes Oxley Act, 289
Scope of work, 558
Scrap value, defined, 12, 558
Section 38 property, 558
Self-contained appraisal report, 198, 559
Serial number of equipment, 35
Serial numbers, aircraft specialty, 324
Sharpe, William F., 129
Signature, 559
Singer Sewing Machine Company, 268
single-period model, 149
Single-phase electricity, 27
Six-tenths factor rule, 52
Size of equipment, 35
607
SL. See Straight line depreciation method
Small business cost of debt, 127
Soft costs. See Indirect costs
Software, computer, 344, 560
Sources of data, 45
Sources of information, 450
Special identification method, 560
Special tooling, classification of, 31
Specific forecast period, 147
Spreadsheets, 340, 560
Standard costing, 560
Standard & Poor’s, 127, 141
Standards for report writing, 198, 199
Stand-by capacity, 561
State certification and licensing, 439
statement of limiting conditions, 211
Steel bars, nominal weight of, 437
Storage equipment, classification of, 29
Straight line depreciation method, 561
Structural supports, classification of, 29
Sublease, 561
Summary appraisal report, 198, 561
Summary page, 562
Summation method, 43, 127
Supplemental standards, 562
Support equipment, classification of, 26, 37
SV. See Salvage value
Switchgear, classification of, 26
608
System software, 339
T
Tables, quick reference, 405
Tangible assets, defined, 14, 125, 562
Tank capacity, 436
Taxation. See Income tax
Tax Equity and Fiscal Responsibility Act of 1982, 562
Tax leases, 562
Technical specialties, 355. See also Machinery and technical specialties
aircraft appraisal, 321
cost survey, 356
marine asset appraisal, 305
oil and gas, 356
public utility, 357
Technological obsolescence, 70
TEFRA. See Tax Equity and Fiscal Responsibility Act of 1982
Term, 562
Terminal rate adjustment clause. See TRAC lease
Terminal value of the asset, 134
Termination date, 563
Termination value, 563
Test equipment, classification of, 31
Three-phase power, 27
Time value of money, 121, 396, 563
Title, 563
Tools, dies, jigs, and fixtures, classification of, 31
Top Bid, 99
609
Total life, 563
Total loss, 563
TRAC lease, 273, 563
Transformed electricity, 27
Treasury bills and bonds, 128
Trend factor, 50
Trending method, 50, 564
True lease, 272, 564
U
UCC. See Uniform Commercial Code
UMBs. See Upper memory blocks
Uniform Commercial Code, 289, 564
Uniform Standards of Professional Appraisal Practice, 9, 13, 198, 259, 444, 565
consulting, defined, 9
development of, 444
standards for report writing, 198
Unit cost method, 49
Unit-in-place method, 565
Unrecovered cost, 565
USB port, 336
Useful life, 565
Use/total use formula and measuring physical deterioration, 60
USPAP. See Uniform Standards of Professional Appraisal Practice
U.S. Treasury bills and bonds, 128
V
Valuation. See also Appraisal
compared with accounting concept, 21
defined, 9, 566
610
depreciation, 13
methodology, 17
Valuation process, 15, 21
goal of, 15
steps, 15
Value. See also Cost approach; Income approach; Sales comparison approach
approaches to determination, 12
defined, 9, 17, 566
premises for machinery and technical specialites, 10
Value Line Investment Survey, 141
Variable operating costs, 566
Vehicles, classification of, 30
Video adapter cards, 336
Visual inspection of machinery and equipment, 36
W
WACC. See Weighted average cost of capital
Wall Street Journal, 142
Weight and measurement tables, 405–426
Weighted average
cost of capital, 125, 148
cost of capital, defined, 566
Whole plant sales comparison approach
limitations of, 112
methodology, 112
Windows-based software, 339
Word processors, 339
GUI, 339
Working capital
611
changes, 140
defined, 125, 567
World Wide Web, 349
WYSIWYG technology, 340
Y
Yachts. See Marine asset appraisal
Yield, 567
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Valuing Machinery

American Society of Appraisers

© Copyright 2000, 2005, 2011 by the

Published in the United States of America.

Sharon Desfor, ASA, MRICS

Definition of Appraisal and Value

Definitions of Value Relating to MTS Assets

Sale for Removal or Alternate Use

Continued Use (or Capacity for Use)

Scrap Value is an opinion of the amount, expressed in terms of money, that

Price and Cost Distinguished

Valuation Depreciation and Accounting Depreciation

Other Accounting Terms

The Valuation Process

(i) sufficient characteristics to establish the identity of the item including

1. The Appraisal Process as Described by USPAP Expanded

2. Collect Relevant Data

3. Apply Appropriate Valuation Methodology and Analytical Techniques

4. Formulate Value (or Other) Conclusions

5. Prepare Appraisal Report

Appraisal Purposes and Definition of Value

Allocation of Purchase Price

Dissolutions of Corporations, Partnerships, and Marriages

Insurance and Loss Settlement

Taxation—Estate and Gift Taxes, Charitable Contributions

Appraisal Standards No. 4, Prospective Value Opinions, p. U-86.

Opinion 29, An Acceptable Scope of Work, p. A-99.

Accounts and Classes

Typical Machinery and Equipment Classes

Figure 2.3. Support equipment – Sterling Maverick Series Granulator.

Motor Control Centers and Switchgear

Figure 2.4. Motor control center.

Figure 2.5. Process piping

Figure 2.6. Process piping.

Foundations and Structural Supports

Material Handling and Storage Equipment

Figure 2.8. An example of plant vehicles.

Figure 2.9. An example of licensed vehicles.

Laboratory and Test Equipment

Identification and Listing of Machinery and Equipment

• Plant capacities: design capacity; rated and actual consistent capacity

Figure 2.10. Manufacturing process for iron and steel10.

equipment. Of prime importance in microidentification is the brand name, model number,

Figure 2.11. Vertical machining center.

The following is an example of how an appraiser might record microidentification

Item: Vertical Machining Center

Identification Through Sampling or Other Abbreviated Analysis Methods

capacity of the plant. Microidentification is the process of finding the individual

Determination of Current Cost New

[T]he replacement would be one of substitution [i.e., replacement cost] rather

Example 1: Replacement or reproduction cost estimated by using the proper

The task is to appraise only the steam generation facilities of a 50,000-bar-

Rated Capacity Chronological Age

Boiler 3 operates in conjunction with boiler 4 and usually operates at or near

Boiler 4 runs continuously, which maximizes its use.

Peak periods are midsummer and midwinter.

a. Peak demand in summer is 100,000 pounds per hour.

Example 2: Replacement cost greater than reproduction cost.

• Chronological age of Model A is 6 years.

Methods of Determining Cost New

Examples of the Direct Cost Method

Example 3: Cost of a machine currently in production.

Example 4: Cost new of a conveyor at the conveyor manufacturer’s plant.