Machinery & Technical Specialties: Cost, Depreciation, and Premise
Machinery and Technical Specialties focuses on tangible equipment, production lines, and specialized installations. The exam tests cost-approach mechanics, the three depreciation categories, and whether the value premise is value in place or value in exchange. Equipment valuation is cost-approach heavy, but market and income methods still appear.
Core rules
- Cost approach: start with replacement cost new (RCN) or reproduction cost new, then add freight, installation, foundations, and taxes where the premise is value in place. Deduct physical deterioration, functional obsolescence, and economic obsolescence.
- Physical deterioration: age/life method or observed condition. Effective age reflects maintenance and use, not chronological age alone.
- Functional obsolescence: excess capital cost or excess operating cost. Curable items are measured by cost to cure; incurable items by capitalized cost disadvantage.
- Economic obsolescence: external factors such as demand, regulation, or location. Apply it after physical and functional deductions, and never to land.
- Market approach: comparable sales adjusted for capacity, condition, age, location, and installation.
- Income approach: capitalize market rent for leased equipment, ensuring the rental rate reflects the same premise.
Worked example
A machine has RCN of $800,000; freight is $20,000 and installation is $80,000, so cost new in place is $900,000. Effective age is 8 years and total life is 20 years, giving 40% physical deterioration, or $360,000; remaining cost is $540,000. A curable functional item costs $30,000 to cure, leaving $510,000. Economic obsolescence of 10% is then deducted: $51,000, for a value of $459,000. The order matters: physical, functional, then economic.
Traps that cost marks
- Deducting functional obsolescence that the replacement cost already eliminates.
- Applying economic obsolescence to land or to the whole facility when only the equipment is affected.
- Ignoring installation, freight, or foundation costs in a value-in-place premise.
- Using forced liquidation value when the engagement calls for fair market value.
- Double-counting physical deterioration through both age/life and observed condition.