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Using Internal Charge Rates to Inform Asset Acquisition: New vs Used Case

Purchasing machinery to upgrade or expand an existing fleet can prove to be a daunting task for today’s equipment managers. Making the decision to buy new versus used can be the difference of thousands of dollars against the company’s bottom line. Although purchasing new models comes with both a higher sticker price and upfront costs, they will likely spent spend less time in the shop and less time incurring maintenance costs. Even so, one still has to face the specter of rapid depreciation, which could prove to be problematic for recovering investments when disposing of the asset in the future. In contrast, used equipment can provide a hedge against inevitable depreciation if it retains strong resale value relative to newer equipment. So long as necessary maintenance costs remain under check, this could be a way to conserve resources; nevertheless, one should not neglect that the used equipment could possibly require more time and money to maintain. This raises the question: at what point does it make sense to purchase new equipment rather than used equipment? Using EquipmentWatch’s Internal Charge Rate Calculator, one has the ability to analyze differences between new and used models insuring better informed purchasing decisions for equipment.

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For demonstrative purposes, four popular models of equipment were chosen for this analysis. These models are the Caterpillar 259D and 236D, as well as the Case 580 SUPER N and Komatsu PC35MR-3. First, costs were calculated for 2017 using the Internal Charge Rate Calculator. Conversely, to simulate rates for used models, 2014 FMV values were taken from EquipmentWatch’s Residual Values App and used as the purchase prices for the Internal Charge Rate Calculator when creating ownership costs. To reflect the higher operating costs that one could encounter with used models, both Field Repair Parts values and Field Repair hours were increased by roughly 5%, however it is important to note here that one can use any percent increase to reflect operating cost expectations.

After calculating rates for both cases for each model, cost changes did behave like one would expect. There were noticeable differences in ownership and operating costs and an overall decrease in internal charge rates between new and used machines. Ownership costs did behave as expected as a general decline was observed ranging from around 25% to 35%, while operating costs only experienced slight increases around 0.5% to 2.7%. On average, internal charge rates for the selected models were lower in the used case despite increasing maintenance costs.

As previously mentioned, observed differences in ownership and operating costs, acquisition prices, and internal charge rates ranged in magnitude between the new and used equipment. Here are some of the highlights from the findings. Using figures from both the Internal Charge Rate Calculator and the Residual Values App, the model with the most significant drop in acquisition price was the Caterpillar 259D whose used 2014 value was 35.61% lower than its value for the 2017 model. In terms of having the largest spread in ownership costs, the Komatsu PC35MR-3 saw a 23.77% decline when observing the costs for the 2014 model. The Caterpillar 236D had the lowest overall increase in operating costs experiencing a 0.6 % uptick. Lastly, the model with the most compelling change in its internal charge rates was once again the 259D with a hefty 12.18% drop when comparing the new model versus the used.

Ultimately, many more factors than the ones addressed here should be considered in deciding whether heavy equipment should be bought new or purchased on the resale channel. Nevertheless, it is important to take into account the extent to which ownership and operating costs can and will vary between new and used assets. But one need not despair because tools like EquipmentWatch’s Internal Charge Rate Calculator make a comparison of this type simple and convenient. Consequently, this analysis can assist in making more informed and calculated decisions in equipment acquisition.