How do you figure Residual Value on heavy equipment??
take it to a ritchie brothers auction
I don't want to sell anything. I just want to know what kinda deprecian values are out there.
i suppose for tax purposes....an IRS tax prep guide would be a place to start in giving you the guidelines as to what they will or will not allow as far as depreciation is concerned. if you just want to determine the worth of machine at a fixed time in the machine's life, that's rather hard to do without a professional appraisal. age/hours/maintenance records/appearance/repairs needed on machine, will determine it's value.
There is a pretty good article called How to Estimate Market Value: There are too many variables to create a simple formula, but this data-based method can help you estimate residual equipment values here http://www.constructionequipment.com/article/CA457578.html?text=residual+value It's written by the only academic guy I know -- Mike Vorster, from Virginia Tech -- who has any real passion and knowledge about construction equipment. Go all the way to the bottom of the text, just above the Sample Data table, and you will find this final paragraph: "This method is a simplified version of one developed for an extensive study into the residual value of certain classes of construction equipment recently completed here at Virginia Tech. For a description of this study and access to the tool developed to estimate residual values." Click on "access to the tool" and you will get a spreadsheet application that uses the methodology described in the story to estimate residual values. It is the result of a sizable study of auction and other resale values done by Virginia Tech.
Nolan, What is it that you are trying to figure out? The market value of a given piece of equipment, how to depreciate a piece of equipment for tax purposes or how to depreciate equipment for a company's balance sheet? They can all be very different.
Determining hourly rates. Cat book says take the cost you paid for it, then figure out the residual value and divide how many hours you plan to get out of it. That gives you your machine hourly rate.
I saved a great Excel sheet from constructionequipment.com for figuring your costs. Click Here To Download You still have to work out certain figures on your own, but it is still very handy for nailing down what everything costs.
That spreadsheet, and a lot of insightful commentary, can be found in this installment of Mike Vorster's Equipment Executive series http://www.constructionequipment.co...tryid=23397#An Owning and Operating Test Case I suggest you take a look at the first articles in this series. They start with basic information used to generate hourly equipment rates, and progress to more and more refinement of the ideas. To read them, go to http://www.constructionequipment.com/community/862/Mike+Vorster's+Equipment+Executive/23397.html -- scroll all the way to the bottom, and start reading from the last story on the list "Four Keys to Control Owning and Operating Costs" http://www.constructionequipment.com/article/CA469314.html?industryid=23397 Other, very pertinent, stories include "Don't Overlook the Cost of Capital" http://www.constructionequipment.com/article/CA469261.html?industryid=23397 -- and "Six Steps to Demystify Depreciation" http://www.constructionequipment.com/article/CA469205.html?industryid=23397 These stories are not text-book imaginings from an ivory tower. Mike works with contractors constantly who test and refine his methods to make sure they're practical. Larry
Hi do you have still this excel sheet?
Hi Larry im trying to access the link but seems no longer active or shall i say no longer posted...do you hapen to have save it..can iget the link?
Hi ÇEwriter can you share your notes on this..seems the link no longer exist.
Local grade contractors can be of more help with that. The local quarry writes their machines down until no value then parks them in the back until they rot as should they sell them the residual value even as scrap has to be accounted to taxes.
Where I have heard the term residual value used before on equipment is in the leasing industry. It basically means what the leasing company will use to figure the worth of the machine at the end of the lease. To show an easy example say you lease a new machine for three years. New cost is $100,000, monthly rate is $1,500 which would leave $54,000 to be paid to purchase the machine. That would be the residual. You could pay the residual and own the machine or just turn it back in and get a new machine again at the same or new rate adjusted for inflation. There are a lot more complications than that because of all the fees plus the interest rates added into the purchase price of the machine. A rule of thumb that I have seen in the past used a ballpark formula of 20% depreciation on the purchase of the machine first year, 10% depreciation from then until year number five, reduce the value by the usual maintenance, repairs and resale profit margin plus a kicker for marketing and you usually end up with a residual value around 10% to 15% of the original purchase price on the five year old machine. There are a large amount variations on this game.
Hi Cat420 can you share that great excel sheet from constructionequipment.com, your earlier link seems no longer exist.
Market value is what the market for a particular property at a specific location at a specific moment in time thinks that property is worth. An appraisal is a properly developed and properly supported estimate of what the market for a particular property thinks that specific property at a specific location at a specific moment in time is worth.
That was deep, almost clear as MO Mud but I understood it!!
Maybe this is a little clearer. Market value is the most probable amount of money a buyer would pay and a seller would accept for an item in a specified market. The biggest characteristic is that the purpose of the asset is to be sold and within and specified time period. As far as appraisals go you might check this out: http://www.amazon.com/dp/B073ZXGQNJ
@Tarhe Driver , DMiller and John C thanks for the feed. Great input guys any newbie would surely get it. Do you happen to know aside from the rule of thumb we use is there a formula to estimate the RMV?
I don't know that I have ever heard of a specific formula that would forecast the value of an asset at the end of a set time limit. What I have done on my own in the past was to consider the type of use for the asset as a way to guess the rate of wear and tear and then consider the time frame. An example might be a D10 used in an open pit mine running three shifts with a term of three years. Three shifts a day would mean 18,720 hours at the end of three years which isn't reasonable in that time frame. You have to shut it down from time to time for maintenance and repairs. So lets say the machine might make 16,000 hours at the end of three years. I would do a market check first on machines three years old with say 14,000 to 17,000 hours. If none were found I would then check on any D10 with around 16,000 hours. What I would be looking for is a market range for liquidation of the asset. Next item concerns the condition of the machine at the end of the term. What will have to be done to the machine to make it marketable and what will it cost. Are there conditions put on the leasee that require a minimum standard of condition for the off lease asset? In this case it might include only Cat wear parts such as the undercarriage, no structural damage to safety items like the ROPS. possibly a performance minimum capability on the engine and drive train and so on. The type of sales avenue is also to be considered. Will the asset be wholesaled to a dealer, sold at retail by your own avenue or sent to auction. What I have gone through is a multi step process for putting together the business proposition. Do I think the financial people go through this? I'm not sure but I kind of suspect they have their own way of doing it. Maybe it's historical, they look back at other lease outcomes. Maybe it's done through complicated financial rules. What I do know is that when I have looked at a lease return from the end point when it is coming back, the process I show above worked.
Market value is kind of a misnomer because sometimes it is assumed that there is a "fair" value for everything like a $20 bill is worth $20. Depending on how specialized a piece of equipment is, there may be only a few people on the entire earth that would want to buy it for more than scrap value. Those guys are limited by how much money they have and what use they can put it to. So one guy might be willing to pay say $20k, the next guy $10k and the last guy $5k. Now if the $20k guy finds another one before he finds yours and buys that one, then your $20k just became $10k overnight. Then somebody else comes along and is willing to pay $15k for it so it bounced back up. But these are all pie-in-the-sky numbers that you can never even know about.
All a shot in the dark at a black target until you put some light to it.
And also, you make your plans using assumptions that may be close enough today, but when the time comes to actually sell it the market may have changed completely. In fact you can count on the market changing completely, it always does.
What you are describing is called risk. You cover that risk with a profit margin. Whatever the finance guys use it must work because only a few go broke and out of business.