When it comes to building up your construction company's work zone equipment fleet, it's important that you make those investments with a solid perspective on the financial ramifications. Sometimes, it's tempting to make the impulsive decision and then think about the aftereffects later. This may end up costing you in the long run. Here's what you need to know about making sure that your equipment purchase is going to get you a worthwhile return from your investment.
Calculate How Much The Machine Depreciates
Depreciation is the gradual reduction in value that all assets experience due to the progression of its useful life. Over the course of the asset's useful life, its value is incrementally reduced to account for wear and tear and the shortened lifespan. This is your company's base cost for owning the equipment if you buy it.
You have to consider the depreciation of the equipment first and foremost so that you know the minimum cost to your business of owning this machine outright. For example, if you are investing in an excavator that's been rated to have a useful life of about 15 years, you start by considering how old that excavator is. If it's brand new, you've got the entire lifespan of the machine to depreciate it. If, however, it's ten years old, you'll only have about five years left to depreciate the remaining value.
To obtain a rough depreciation estimate for return on investment purposes, you can divide your upfront cost of the machine by the number of months of the remaining lifespan that the machine has. For example, if you buy the excavator for $210,000 and it has a remaining useful life of 7 years, you would divide 210,000 by 84, which is the number of months left in its useful life. That gives you a depreciation value of $2,500 per month.
Figure Out What It Would Cost To Rent The Equipment
In order to figure out the true return of buying the equipment, you need to consider what you would spend if you were renting that equipment for the same amount of time. For example, you may be able to rent the same excavator for $8,000 per month from a machinery supplier.
That means you would be spending $5,500 per month more than what you would lose in depreciation value for a purchased excavator. When you multiply the monthly savings by twelve months, you find that buying the excavator could ultimately save you $66,000 for every year that you need to use the excavator. If you would be renting an excavator for that same seven-year period, that's a total savings of $462,000 over the remaining life of that excavator.
Obviously, if you wouldn't be using the excavator on a regular basis or wouldn't need to rent a machine for the full seven years, you'd want to factor that in when you're assessing the total savings from a purchase versus rental.
Assess Your Resale Options
The final factor that you should take into consideration to determine your return on investment is the resale value of the machine once it's hit the end of its useful life. Each piece of work zone equipment has an end-of-life value that is approximately what it could resell for once you're ready to retire it.
You should consider that as money back to offset your overall costs from owning the machine. For example, if you are paying $210,000 for an excavator that is estimated to have a $65,000 end-of-life value, you're actually only going to be paying $145,000 for the equipment. You may pay more than that if you're not able to sell the machine for the full final value, but the more you can sell it for, the greater your return on the investment.