Residual Values: A Critical Factor in Equipment Life Decisions

Why Residual Value Matters

The true value of data becomes apparent when the impact of losses and the possibility of cost optimization become clear. This is especially evident in the case of residual value (RV), sometimes known as Residual Market Value (RMV). In the past, there was simply not enough access to usable data to make determined decisions on RV calculations for heavy equipment. In the modern, data-driven era, however, this no longer holds true.

The most knowledgeable equipment managers and buyers use RV as an important input of the rent-versus-buy equation for the equipment under consideration. Using this approach, potential buyers can more confidently predict the future value of their assets. Incorporating residual values can help match expected equipment utilization to value and provides a point of reference for model-to-model comparisons.

A Critical Input for Purchase and Disposition

To stem the tide of losses resulting from lost bids, residual values should be included in rate calculations to make better estimates of what machines may sell for in the future. RV has been applied to heavy equipment through research studies at Virginia Tech, led by Mike Vorster, the preeminent equipment economist. This research indicates that it is indeed possible to make informed and accurate RV calculations using data aggregated from auction reports, including inputs for manufacturer, condition rating, geographic region, and asset age.

The impact of including RV becomes even clearer when it is applied to the timing of the “sweet spot” for disposition of equipment. In this case, RV can provide an incentive to manage the life of your assets more closely, and ultimately provide a newer and more reliable fleet. According to Vorster, including RV allows equipment owners, dealers, and financial institutions to “cover owning costs and avoid high operating costs, high downtime, and low reliability.”

EquipmentWatch not only understands these dynamics but has access to over 13,000 models and 20 years of equipment valuation experience to prove it. Our Residual Values App provides visualized and graphed residual values projected out to 84 months for FMV and FLV, and accurate values using adjustments for original price, condition, region, and options and extras for each year of the valuation. And our Residual Values Audit Risk Review enables financial institutions and equipment dealers to manage a well-balanced portfolio and stay informed of potential equity risks. This service provides a fast, cost-effective, and efficient process to identify risk across the entire lease portfolio.

Effect of FMV
Figure 1: An Example of How Residual Value Affects O&O Costs and the “Sweet Spot.” Source: Mike Vorster, Construction Equipment https://bit.ly/2XALwdw

To learn how EquipmentWatch can deliver RVs that are significantly less expensive and faster than compiling the analysis manually, schedule a demo with one of our experts today: EquipmentWatch Demo

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Keith Tyson
Brand Marketing, EquipmentWatch
keith.tyson@informa.com

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