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The figure also takes into account a full year of use, whether the unit is on a job or sitting in the yard over
the winter. In other words, the cost of holding the unit is figured into this equation.
Looking at it from the opposite view, we have a $100,000 unit with a 30% residual we have to allocate over
a five-year holding period. That means allocating $70,000 over five years or $14,000 per year as a fixed
cost. Add to that sales tax, insurance, interest, parts and service, storage, delivery and pickup, and pretty
soon you start closing in on the $30,000 number. That $30,000 may not be a hard number in the first year
of operation, but it will average out to this figure over the five-year period.
In reality, the cost of the equipment will be determined by the annual utilization, interest, maintenance costs
and who performs it, trucking and pure daily operating costs. The useful life is also a major factor in this
process. The longer you can keep the equipment operating efficiently, the lower your annual cost will be.
Once you figure the annual equipment cost, you either charge out the entire cost based on an hourly or
daily rate; adjust the rates to compensate for winter or expected down time; or charge the unallocated cost
to overhead. Keeping your rate to 50% to 60% of the rental company rental rate should put you in the
ballpark for preparing budgets, etc.
At some point of utilization, it does not pay to own the equipment. If you can, it will be more efficient to rent
the equipment on a job by job basis. You may have to keep a minimum inventory of equipment on hand,
but most should be rented if you find yourself in this position.
Is it working?
You can all crunch the numbers to see how your equipment costs are running and how your recovery
technique is working.
Take the largest piece of equipment you own and schedule out the fixed costs: monthly debt service,
storage and insurance. Then estimate the hours or days in use and attach operating costs such as fuel,
maintenance and delivery. Add it all up and divide by 250 (number of working days in a year) to come out to
a daily rate. If the unit sits in the winter, you can adjust the 250 number to a lower figure.
The result you come up with is what you have to recover to break even on your unit from a cash
perspective. Notice I substituted the full note payment for depreciation and interest amounts. You can run it
both ways if you want.
There is no magic formula here. The logic expressed is to compare your equipment costs to how a rental
company may do it, then adjust from there as long as you have the proper information to do so. Most of
the information you need to make this calculation should be available from either your dealer or from rental
company quotes. Make the most of these sources.
Garry Bartecki is director of dealer/distributor services at BDO Seidman, LLP of Chicago, as well as a
consultant to the AED. He has also worked as an independent CPA and consultant to equipment dealers.
He can be reached at (312) 616-4677 or gbartecki@bdo.com.
Equipment Rental Equation
Multiply the total cost of a piece of equipment x 5%/month x 13 x 80% to arrive at the estimated annual
rental dollars. Following is an example:
Equipment cost $100,000
Depreciable life 5 years w/30% residual
Rental rate 5% per month rent
Rental periods 13 or every 28 days
Time utilization 80%
$100,000 X 65% (5 x 13) ---- $65,000 X 80% ---- $52,000
$52,000 X 60% (removing rental GP) ---- $31,000
Determine the rate of interest. The rate of interest for the present
value calculation (PV) is the average rate of interest you are paying on
your equipment. For this example, let's assume a rate of 9 percent.