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06

Aug

5 Steps to Calculating ROI On Construction Equipment

Purchasing Construction Equipment: Calculating the Return on Investment


Buying used construction equipment, especially high-ticket items, can be an unsettling process. There are few resources like we have in cars and homes to know what is considered a good price before we buy.


Having the assurance that an equipment purchase will generate net positive cash flows within a year or two makes a five or six figure price an easier pill to swallow.


In the below example, I break down how to calculate the ROI of a 2011 150 foot boom lift listed at $103,000.


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 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.

1.   Determine the Depreciation Cycle

The first step is to determine your depreciation cycle. As soon as you acquire a piece of equipment, whether used or new, it begins to depreciate. Depreciation is the reduction in value of the asset with the passage of time.


In this example, we know that the average useful rental life of a 150 foot boom lift, if properly maintained, is around 12 years.


Given that this is a 2011 model, we know that we have about 5 years left of rental value left therefore making the depreciation cycle 5 years or 60 months.


This means that we will get a depreciation value of $1,716 per month by dividing the sale price ($103,000) by the remaining useful life (60 months).

2.   Identify the Retail Rental Rate

Based on experience, we know that we can rent this machine for about $13,500 per month. For a more data informed approach to setting rental rates, data companies such as EquipmentWatch can be extremely useful resources.


This leaves us with a profit of $11,784 (rental rate – monthly depreciation) if we receive 100% utilization.


However, we all know 100% utilization is impossible which we adjust for in step 4.

3.   Calculate Blended Retail Rate


Something that is often overlooked is that the 150ft boom lift in our example can also be rented as a 135ft boom lift. This is true for most equipment and is important to keep in mind while calculating the ROI of equipment. In order to achieve high utilization rates, you won’t always be renting the equipment for it’s maximum working height or capacity. 


In this case, we know we can rent 135ft boom lifts for about $8,500 per month at retail. This would give us a profit of $6,784 per month by again subtracting the monthly depreciation from the monthly retail value.


Once all rates are calculated, we need to blend the rates to get an average monthly retail value and average monthly profit. In this example, our blended average of our 150ft boom lift retail rate and our 135ft boom lift rental rate is $11,000 per month.

4.   Estimate Utilization Rate


Knowing that 100% utilization is impossible, create different utilization tiers to understand profitability per tier.


In our example, we use a 60% utilization rate which equates to $66,844 in annual profit. Multiply that profit over the 5 years of useful rental life and you have $334,224 total profit over 5 years. 

5.   Factor in Resale Value

Lastly, you need to factor in what the resale value is after the 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 multiply by .99).


Continue to multiply each month by 99% until you hit the 5 year mark. In this example, our estimated resale value is $56,926. Add the resale value into your 5 year rental profit to get the total 5 year profit.




Resale Valuation


January 2019

$103,000


February 2019

$101,970

Reduces the valuation by 1% per month

March 2019

$100,950


April 2019

$99,941


May 2019

$98,941

Duplicate the calculation over the useful lift

December 2023

$56,926



ROI Calculation Example


ROI CALCULATION


Acquisition Cost

$103,000

Depreciation Schedule (Months)

60

Depreciation per Month

$1,717



RENTED AS A 150'


Retail Rental Rate per Mo

$13,500

Profit per mo as a 150'

$11,783

Annual Potential Profit

$141,400

At 80% Utilization

$113,120

At 70% Utilization

$98,980

At 60% Utilization

$84,840

At 50% Utilization

$70,700



RENTED AS A 135'


Retail Rental Rate per Mo

$8,500

Profit per mo as a 135'

$6,783

Annual Potential Profit

$81,400

At 80% Utilization

$65,120

At 70% Utilization

$56,980

At 60% Utilization

$48,840

At 50% Utilization

$40,700



BLENDED AVG


Retail Rental Rate per Mo

$11,000

Profit per mo as a 135'

$9,283

Annual Potential Profit

$111,400

At 80% Utilization

$89,120

At 70% Utilization

$77,980

At 60% Utilization

$66,840

At 50% Utilization

$55,700

Blended Avg Profit Over 5 Yrs at 60% Utilization

$334,200

Resale Value in 5 Yrs

$56,926

Gross Profit in 5 Yrs

$391,126

Net Profit in 5 Yrs

$288,126

Payoff Period in Yrs

1.54



Given a 60% utilization, your net profit from the machine rented at both a 135’ and 150’ boom is $288,126 and you can expect to pay off the price of the machine in 1.5 years.