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The current cost to acquire a new machine with equal utility — the starting point for cost-approach appraisals before deducting physical depreciation, functional obsolescence, and economic obsolescence.
Replacement Cost New (RCN) is the foundation of the cost approach to equipment valuation. An appraiser establishes RCN from:
From RCN to value
RCN is then depreciated by three factors:
1. Physical deterioration — wear, hours, maintenance history
2. Functional obsolescence — technological improvements mean the old machine produces less efficiently than a new one
3. Economic obsolescence — external market conditions (e.g. overcapacity in the industry) that reduce demand regardless of condition
Indicated Value = RCN − Physical Depreciation − Functional Obsolescence − Economic Obsolescence
When the cost approach is most reliable
The cost approach is preferred when:
For most used industrial equipment with an active secondary market, the sales comparison approach (benchmarking against actual transactions) is more reliable than RCN.
Related terms
