How To Calculate Equipment ROI
How To Calculate Equipment ROI
Learn how to calculate the ROI of a piece of equipment before you buy it and add it to your rental fleet.
Adding used heavy equipment to your fleet, such as the 150’ boom I use in this example, can be a great way to generate new cash flow in 2019. Having the assurance that a large purchase like this will generate net positive cash flows in a matter of a year and a half makes a six figure price an easier pill to swallow.
Below I breakdown an example of an ROI analysis you can emulate when evaluating your next purchase.
In this example, we are looking at acquiring a 2011 150’ boom lift for $103,654. If you’d like validation that you are getting a good price, resources such as EquipmentWatch can be invaluable.
First, we will use a 5 year depreciation cycle. Given that the average useful life of a 150’ boom lift, if properly maintained, is around 12 years, this 2011 conservatively has about 5 years left of rental value.
This means that, over the 60 months, we will get a depreciation value of $1,728 per month by dividing the sale price ($103,654) by the lifetime (60 months).
Next we need to identify the Retail Rental Rate per month. Based off experience, we know that we can rent this machine for about $13,500 per month. Again, EquipmentWatch data can be a great tool to identify the right retail rental rate if you don’t know it.
This leaves us with a profit of $11,772 per month or $141,269 per year (Retail rental rate - monthly depreciation).
However, this number is at 100% utilization so it is smart to calculate what that number would be at different tiers of utilization by multiplying the yearly profit by 90%, 80%, 70%, 60% etc.
Furthermore, this 150’ can also be rented as a 135’ boom so we need to take that into account.
We know we can rent 135’ booms for around $8,500 per month retail. This would leave us with a profit of $6,772 per month or $81,269 annually by again subtracting the depreciation per month ($1,728) from the monthly retail value.
Now we need to blend the two rates so we can get an average monthly retail value and average monthly profit. $13,500 as a 150’ boom and $8,500 as a 135’ boom average out to $11,000 retail value per month which would leave us with a $9,272 profit per month or $111,269 a year.
Multiply that rate by a certain utilization (we will use 60%) to get $66,762 profit per year. Multiple that profit over the 5 years and you have $333,808 total profit over 5 years.
Lastly, you need to factor in what the resale value is after that 5 years. In order to do so, you need to perform a Resale Economic Valuation. To do so, start with your sale price of $103,654 and subtract 1% from that price every month (or multiple by .99). This can easily be done in an Excel spreadsheet by doing the following:
January 2019: $103,654
February 2019: $102,617
March 2019: $101,591
April 2019: $100,575
May 2019: $99,570
June 2019: $98,574
And so on until you hit December of 2023. In the second row, all you need to do is type in the equation =B2*.99 and drag that equation down to the bottom of the spreadsheet. This will multiply the previous rows value by 99%.
By doing so, we see the resale value in December of 2023 is $57,288.
Add that resale value to your 5 year rental profit and you will get $391,095 total.
Given a 60% utilization, your profit from the machine rented at both a 135’ and 150’ boom, you can expect to pay off the price of the machine in 1.5 years giving you 3.5 years of pure profits.
This methodology is not an exact science but gives you a good estimate of the ROI of a machine prior to purchasing. You can also factor in additional costs for potential parts and servicing if you’d like an even more conservative estimate. This kind of analysis is highly recommended in order to help with your negotiation as well as ease your hesitation when adding a new or used piece of equipment to your rental fleet.