FINANCE SERVICES

Factors in Determining Equipment Residual Values

In almost all types of leasing agreements it is necessary to accurately determine the expected market value of the unit at the termination of the agreement. The lending party is responsible for establishing the residual values. Residual values, which are usually expressed as a percent of original list price, have several influencing factors. Some of these factors include:

• Equipment Model: Some models bring a much higher percent of original list price than others. Each model has its own “track record” in the used equipment market.

• Model Specifications: Specifications can have a considerable effect on the unit’s residual value. Models with specifications in demand can command higher residual values. Likewise, machines with less popular specifications will have lower residual values.

• Age: The unit’s age affects its value. However, actual running hours on the equipment are just as important. If the equipment, at lease termination, is still a current production model, its age, whether four, five, or six years, is not as critical when compared to obsolete models. Age, in years, becomes more important if the equipment is over five years old. Hours of use are more important in the equipment one to three years old.

• Equipment Applications: The type of operation where the leased equipment has been performing has a direct affect on its condition, appearance, and thus its residual value. In general, the lighter and cleaner the application, the higher the residual value.

• Maintenance: The degree to which the equipment has been properly maintained has an obvious effect on residual value.

• Inflation: In general, inflation has the same effect on used equipment prices as it does on new equipment prices. Therefore, the retail value of a retired rental or leased unit is, in addition to the other factors, a product of the inflation rate during the term of the lease.

• Used Equipment Market Conditions: The demand for used equipment fluctuates substantially. In many cases the ups and downs are more pronounced than those found in the new equipment market. Retiring fleets of equipment by various users and manufacturers can upset a local used equipment market. While these fluctuations are usually short term in nature, they are rarely predictable and can have an effect on the actual realization of a residual value established several years before.

• Attachments: Most all attachments with some exceptions are subject to significantly lower residual values than the equipment itself. The reason for this is that there is a very limited market for used attachments.