Understanding Construction Equipment Depreciation and Resale Value
Construction equipment is a huge investment. Whether it is an excavator, bulldozer, crane, or forklift, the initial cost is enormous. However, one of the most important things to consider after the initial purchase price is the depreciation of the equipment and its resale value. By understanding depreciation and maintaining your crane or loader value, you can make smarter purchasing decisions. This approach helps you achieve the best return on investment and can potentially save your business thousands of dollars.
In this blog, we will discuss the critical drivers of construction equipment depreciation. But first, let’s learn what depreciation is.
What is Depreciation?
It refers to the gradual reduction in the value of equipment with time. Every time construction equipment is used, its value reduces a little. In reality, depreciation reflects the natural wear and tear on machinery and the fact that the utility or value is diminishing with the influx of newer models and technology.
The value of construction equipment only makes sense if the business understands its depreciation because it is what determines the value and accounting for the equipment while reselling. Construction equipment depreciation helps a company make an estimation of the value of the equipment at a given time. This could be important in budgeting and long-term planning.
Why Does Construction Equipment Depreciate?
Construction equipment depreciates due to a number of factors:
Wear and Tear
Heavy usage definitely depreciates equipment faster. For instance, a daily use of a backhoe loader in rough terrain will depreciate faster than one that sometimes uses it on smoother site conditions.
New Technologies
More so, the older units will depreciate fast especially with the introduction of a new technology. For instance, newer excavators with state-of-the-art fuel efficiency techniques or automated features will create a perception that older versions are outdated.
Market Conditions
Some equipment may depreciate in value due to its reduced demand. For instance, construction equipment. If the industry turns against using a particular machine type, then the value degrades.
Environmental Factors
Exposure to bad weather, corrosive chemicals and improper handling can be destructive.
Each of these variables impacts the rate at which equipment depreciates, which is why some types of machinery have shorter useful lives than others.
Methods of Computing Depreciation
There are several ways of calculating depreciation, and various methods may be used depending on accounting practices, tax requirements, and business preferences. Here are a few of the most commonly used methods:
Straight-Line Depreciation
This is the most simplistic approach. It assumes that the equipment loses value uniformly throughout its useful life. To calculate straight-line depreciation, subtract the equipment’s salvage value (estimated resale value at the end of its useful life) from the original cost, then divide by the number of years of useful life.
Annual Depreciation = Cost- Salvage Value/Useful Life in Years
Declining Balance Depreciation
In this method, the equipment under this system depreciates much in the early years of its life cycle. Depreciation based on use is usually applied to equipment that is used more within the early years of the life cycle.
Depreciation Based on Use
This technique assesses the loss in value of equipment according to the number of hours used or the equipment’s production. For instance, if a bulldozer is used often in year one, its depreciation will be larger than if it is only used a few times during the year.
All of these depreciation methods will give you an understanding to make intelligent financial decisions, prepare for replacing items, and budget for the future needs of equipment.
Factors Affecting Resale Value
Resale value is what you are going to get when selling the equipment later. A number of factors can have an impact on the resale value of construction equipment such as:
Brand and Model
Well-known brands for their longevity are usually less prone to devaluation. A more popular model, especially if the brand has an excellent history for being a hot item in the marketplace, will fetch a better resale value.
Condition
Any used equipment that has few visible signs of wear and functions properly is worth much more than equipment with apparent damage or brokenness.
As a general rule, new equipment holds more resale value. Older equipment that has been well-maintained will always hold some value and, attached to a well-known brand name, holds a good amount of value.
Hours of Operation
Just as your car holds mileage, hours of operation on construction equipment can make a difference in the resale value. The less use, the less wear and tear, which translates into more value for resale.
Maintenance Records
Maintenance and service records will improve the buyer’s confidence. Equipment which has good service records, so as a result is maintained properly, can sell better in the resale market.
Market Conditions at the Present Time
Demand in the market for a type of equipment keeps varying based on an industry’s requirement, economy conditions, and technology updations. If green construction demands rise, equipment which holds some features related to an environment will get premium.
Optimization of Resale Value
If you plan to sell your equipment later, then observe the following tips to have the highest resale value for your equipment:
Maintenance. Scheduled maintenance is one of the very best ways to maintain the condition and value of the equipment. It includes oil changes, cleaning, filter replacement, and checking on the functionality of key components. Your machine will perform better and last longer, it will look better, and it will operate efficiently.
Record All Service
Maintain an exceedingly detailed repair and service history of everything. The client is very much impressed to note how old or new the machinery really is, and this gives it great credibility to how good its used condition could be.
Contemplate Closing Storage
If your tools are idle at times you can place your equipment into a covered or overtop location which gives excellent shielding during extreme weather events to heat and cold temperatures as well as wet environments such as through rain. Greater frequency of the sun, more frequent rainfall plus extreme temperatures will age plus cause decay in parts that means a direct way to having less resale value from this product.
Use Quality Parts for Repairs
Where possible, use Original Equipment Manufacturer parts in performing repairs. These tend to be of better quality as well as ensure the maintained performance standards of the machines. This helps keep equipment at a value.
Refurbish Before Selling
When selling, consider revamping the equipment. Changes of worn-out parts with new ones, repainting, and cosmetic repair may refurbish the equipment to its face value.
Stay Updated with Market Trends
Knowing what equipment is in demand will help you to plan when to sell. For example, if the market trend is toward the use of eco-friendly or technologically advanced equipment, selling the older models earlier may allow you to sell them at a higher price before demand decreases.
When is the Best Time to Sell?
Timing is everything when it comes to resale value of construction equipment. Most firms resell equipment when it has reached around 50-70% of its useful life, that’s when depreciation starts to slow down and the maintenance hasn’t risen too high yet.
Market demand for specific types of equipment also determines resale timing. Selling when demand is high can help you secure a better price. Waiting too long, however, may further depreciate the equipment’s value. If newer models with advanced features enter the market, the resale value of older equipment can drop even more.
Smart Investment in Equipment
Depreciation and resale value are two important factors that need to be understood while investing in construction equipment. Here are some final considerations that will help you make smart choices:
Consider Total Cost of Ownership
This would involve purchase price, maintenance costs, fuel costs, insurance costs, and depreciation. Sometimes equipment that has a higher price at purchase, has higher resale value because it remains good for years.
Consider Brand Reputation
Brands with reputations are always less risky as they prove to be reliable and to last longer thereby having better resale value.
Think long-term
How long would you use the equipment? If it is for a very short period, then leasing can be more economical while buying is ideal for longer periods of usage.
Conclusion
Proper maintenance and keeping an eye on the resale value of your loader machine include depreciation. It works on the principle that your asset depreciates with time and needs to be maintained based on market trends. Understanding depreciation helps construction businesses in taking better financial decisions to ensure a profitable fleet with its assets holding as much value over time as possible.
