Lesson 6: Factor Adjustments
Check Your Knowledge
The exercises below are to be worked by participants to ensure comprehension of information discussed in this lesson. Additionally, it will help prepare certified property tax appraisers for the final examination that must be taken upon completion of this training session in order to receive appraisal training credit.
Before you start, please print the exercises using the "Print Questions" link below so you can work through the exercises on your own. After you work through the exercises, the solution can be viewed by clicking on the blue plus sign immediately following the question on the right hand side of the page. Additionally, when you have completed all the exercises, you may print all of the solutions using the "Print Questions with Answers" link below.
While all the exercises shown below use lien date 2011 for illustrative purposes, it must be remembered that it is the lien date for which values are sought that determines which AH 581 – and associated factors – will be used.
Exercise 1
Determine the Recommended Maximum Index Factor for the following types of equipment based on the given economic life (service life), as of lien date 2011 (January 1).
Solution
Solution:
- Maximum Index Factor Age = Economic Life × 125%
(15 × 125% = 19 years)
Maximum Index Factor Year = Valuation Lien Date Year - Maximum Index Factor Age
(2011 - 19 years = 1992)
Recommended Index Factor corresponds to Maximum Index Factor Year
152 ⇔ 1992 (2011 AH 581 Table 1 - Commercial)
- Maximum Index Factor Age = Economic Life × 125%
(8 × 125% = 10 years)
Maximum Index Factor Year = Valuation Lien Date Year - Maximum Index Factor Age
(2011 - 10 years = 2001)
Recommended Index Factor corresponds to Maximum Index Factor Year
120 ⇔ 2001 (2011 AH 581 Table 2 - Industrial)
- Maximum Index Factor Age = Economic Life × 125%
(12 × 125% = 15 years)
Maximum Index Factor Year = Valuation Lien Date Year - Maximum Index Factor Age
(2011 - 15 years = 1996)
Recommended Index Factor corresponds to Maximum Index Factor Year
137 ⇔ 1996 (2011 AH 581 Table 3 - Construction)
- Maximum Index Factor Age = Economic Life × 125%
(6 × 125% = 8 years)
Maximum Index Factor Year = Valuation Lien Date Year - Maximum Index Factor Age
(2011 - 8 years = 2003)
Recommended Index Factor corresponds to Maximum Index Factor Year
128 ⇔ 2003 (2011 AH 581 Table 1 - Commercial)
Exercise 2
In 1994, a company purchased light plant equipment for $100,000. If the economic life of light plant equipment (non-mobile construction equipment) is 12 years, what is the recommended maximum index factor for use in valuing this type of equipment, as of lien date 2011 (January 1); and what is its RCN?
Solution
Solution:
Recommended Maximum Index Factor
- Maximum Index Factor Age = Economic Life × 125% (converted to a decimal equivalent)
- Maximum Index Factor Age = 15 years (12 years × 1.25)
- Maximum Index Factor Year = Valuation Lien Date Year – Maximum Index Factor Age
- Maximum Index Factor Year = 1996 (2011 – 15 years)
- Recommended Maximum Index Factor = 137 (Table 3 index factor for 1996)
- Calculate the Maximum Index Factor Age* for the equipment by multiplying its economic life by 125 percent. (Economic life determined to be 12 years based on a review of the CAA tables, as discussed in Lesson 5.)
12 years × 1.25 = 15 years* (rounded to the nearest whole number)
- Calculate the Maximum Index Factor Year for the equipment by subtracting its Maximum Index Factor Age from its valuation lien date year.
2011 - 15 years = 1996
- Locate the Recommended Maximum Index Factor by finding the construction index factor corresponding to the Maximum Index Factor Year, using 2011 AH 581 Table 3: Agricultural and Construction Equipment Index Factors.
1996 = 137
RCN
- Acquisition Year Index Factor = 143 (Table 3 construction index factor for 1994)
- The lesser of the Recommended Maximum Index Factor and the Acquisition Year Index Factor = 137 < 143
- RCN = Cost × Index Factor (converted to decimal equivalent)
- RCN = $100,000 × 1.37
- RCN = $137,000
- Determine the Acquisition Year Index Factor by finding the "construction" equipment index factor corresponding to the year that the equipment being valued was acquired (1994), using Table 3 of the January 2011 AH 581.
1994 = 143
- Select the lesser of the Recommended Maximum Index Factor and the Acquisition Year Index Factor for use in valuing the equipment.
137 < 143
- Calculate the RCN (2011) for the equipment, by multiplying the acquisition cost of the equipment by the decimal equivalent of the index factor selected in the preceding step.
RCN = $100,000 × 1.37 = $137,000
Exercise 3
In 1995 a company purchased laboratory centrifuge equipment for $75,000. If the economic life of laboratory equipment is 10 years, what is the recommended maximum index factor for use in valuing the equipment, as of lien date 2011 (January 1); and what is its RCN?
Solution
Solution:
Recommended Maximum Index Factor
- Maximum Index Factor Age = Economic Life × 125% (converted to a decimal equivalent)
- Maximum Index Factor Age = 13 years (10 years × 1.25)
- Maximum Index Factor Year = Valuation Lien Date Year - Maximum Index Factor Age
- Maximum Index Factor Year = 1998 (2011 - 13 years)
- Recommended Maximum Index Factor = 134 (Table 1 index factor for 1998)
- Calculate the Maximum Index Factor Age for the equipment, using the formula:
Equipment Economic Life (years) × 125% = Maximum Index Factor Age (years)*.
10 years × 1.25 = 13 years *(rounded to the nearest whole number)
- Calculate the Maximum Index Factor Year for the equipment, using the formula:
Valuation Lien Date Year - Maximum Index Factor Age = Maximum Index Factor Year.
2011 - 13 years = 1998
- Locate the Recommended Maximum Index Factor by finding the “commercial” equipment index factor corresponding to the Maximum Index Factor Year (1998), using Table 1 of the January 2011 AH 581.
1998 = 134
RCN
- Acquisition Year Index Factor = 139 (Table 1 index factor for 1995)
- The lesser of the Recommended Maximum Index Factor and the Acquisition Year Index Factor = 134 < 139
- RCN = Cost × Index Factor (converted to decimal equivalent)
- RCN = $75,000 × 1.34
- RCN = $100,500
- Locate the Acquisition Year Index Factor by finding the "commercial" equipment index factor corresponding to the year that the equipment being valued was acquired (1995), using Table 1 of the January 2011 AH 581.
1995 = 139
- Select the lesser of the Recommended Maximum Index Factor and the Acquisition Year Index Factor for use in valuing the equipment.
134 < 139
- Calculate the RCN (2011) for the equipment, by multiplying the acquisition cost of the equipment by the decimal equivalent of the index factor selected in the preceding step.
RCN = $75,000 × 1.34 = $100,500
Exercise 4
In 1987 a cannery operator purchased cannery equipment for $825,000. If the economic life of cannery equipment is 17 years, what is the recommended maximum index factor for use in valuing this equipment, as of lien date 2011 (January 1); and what is its RCN?
Solution
Solution:
Recommended Maximum Index Factor
- Maximum Index Factor Age = Economic Life × 125% (converted to a decimal equivalent)
- Maximum Index Factor Age = 21 years (17 years × 1.25)
- Maximum Index Factor Year = Valuation Lien Date Year - Maximum Index Factor Age
- Maximum Index Factor Year = 1990 (2011 - 21 years)
- Recommended Maximum Index Factor = 143 (Table 2 index factor for 1990)
- Calculate the Maximum Index Factor Age for the equipment, using the formula:
Equipment Economic Life (years) × 125% = Maximum Index Factor Age (years)*.
17 years × 1.25 = 21 years *(rounded to the nearest whole number)
- Calculate the Maximum Index Factor Year for the equipment, using the formula:
Valuation Lien Date Year - Maximum Index Factor Age = Maximum Index Factor Year.
2011 - 21 years = 1990
- Locate the Recommended Maximum Index Factor by finding the "industrial" equipment index factor corresponding to the Maximum Index Factor Year (1990), found in the preceding step, using Table 2 of the January 2011 AH 581.
1990 = 143
RCN
- Acquisition Year Index Factor = 161 (Table 2 index factor for 1987)
- The lesser of the Recommended Maximum Index Factor and the Acquisition Year Index Factor = 143 < 161
- RCN = Cost × Index Factor (converted to decimal equivalent)
- RCN = $825,000 × 1.43
- RCN = $1,179,750
- Determine the Acquisition Year Index Factor by finding the "industrial" equipment index factor corresponding to the year that the equipment being valued was acquired (1987), using Table 2 of the January 2011 AH 581.
1987 = 161
- Select the lesser of the Recommended Maximum Index Factor and the Acquisition Year Index Factor for use in valuing the equipment.
143 < 161
- Calculate the RCN (2011) for the equipment, by multiplying the acquisition cost of the equipment by the decimal equivalent of the index factor selected in the preceding step.
RCN = $825,000 × 1.43 = $1,179,750
Exercise 5
In 1990, a cotton farm purchased four cotton gins for $235,500. If the economic life of non-mobile agricultural equipment is 15 years, what is the recommended maximum equipment index factor for use in valuing the cotton gins, as of lien date 2011 (January 1); and what is its RCN?
Solution
Solution:
Recommended Maximum Index Factor
- Maximum Index Factor Age = Economic Life × 125% (converted to a decimal equivalent)
- Maximum Index Factor Age = 19 years (15 years × 1.25)
- Maximum Index Factor Year = Valuation Lien Date Year - Maximum Index Factor Age
- Maximum Index Factor Year = 1992 (2011 - 19 years)
- Recommended Maximum Index Factor = 157 (Table 3 agricultural index factor for 1992)
- Calculate the Maximum Index Factor Age for the equipment, using the formula:
Equipment Economic Life (years) × 125% = Maximum Index Factor Age (years)*.
15 years × 1.25 = 19 years *(rounded to the nearest whole number)
- Calculate the Maximum Index Factor Year for the equipment, using the formula:
Valuation Lien Date Year - Maximum Index Factor Age = Maximum Index Factor Year.
2011 - 19 years = 1992
- Locate the Recommended Maximum Index Factor by finding the "agricultural" equipment index factor corresponding to the Maximum Index Factor Year (1998) using Table 3 of the January 2011 AH 581.
1992 = 157
RCN
- Acquisition Year Index Factor = 167 (Table 3 agricultural index factor for 1990)
- The lesser of the Recommended Maximum Index Factor and the Acquisition Year Index Factor = 157 < 167
- RCN = Cost × Index Factor (converted to decimal equivalent)
- RCN = $235,500 × 1.57
- RCN = $369,735
- Determine the Acquisition Year Index Factor by finding the "agricultural" equipment index factor corresponding to the year that the equipment being valued was acquired (1990), using Table 3 of the January 2011 AH 581.
1990 = 167
- Select the lesser of the Recommended Maximum Index Factor and the Acquisition Year Index Factor for use in valuing the equipment.
157 < 167
- Calculate the RCN (2011) for the equipment, by multiplying the acquisition cost of the equipment by the decimal equivalent of the index factor selected in the preceding step.
RCN = $235,500 × 1.57 = $369,735
