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Understanding Retained Values and Ownership Costs

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What are equipment ownership costs and retained values, why do they matter, and what do they look like in practice?

Each year, EquipmentWatch analyzes cost of ownership and retained values for the construction, lift, and agriculture equipment industries and selects the best performing manufacturers for the prestigious Lowest Cost of Ownership (LCO) and Highest Retained Value Awards (HRVAs). Winners for the 2021 LCO and HRVAs were announced last month at World of Concrete 2021 in Las Vegas. (Click here to see the full list of 2021 LCO and HRVA winners.) 

In this month’s Market Report, we are providing an explainer for what ownership costs and retained values are, why they matter, and what they look like in practice. 

Retained Value

Simply put, retained values are what you can anticipate a piece of equipment to be worth after a given period of time. Retained values are inseparable from the concept of depreciation, which is a measure of how far a piece of equipment’s value decreases over time. EquipmentWatch’s retained values are calculated using market data, depreciation standards, and our proprietary algorithm. For more information on our methodology, click here. 

Percentage vs. Dollar Value

Depreciation and retained values are inherently reliant upon purchase price. With so many ways to adjust the value of a piece of equipment, which varies based on utilization, region, condition, components, and more, it would be difficult to estimate exact dollar values to cover every possible variation. Instead, we measure retained values as the average percentage of initial value retained after five years for equipment purchased new or on the used market. This approach provides you with an apples-to-apples way to compare equipment brands. Using percentages eliminates confusion when comparing brands that may have materially different purchase prices and an asset with a higher dollar value at the end of the 5-year-period may have simply started out with a higher original cost.

Retained Value Comparisons

So, what does this look like in practice? Below we have examples of two of the 2021 HRVA winners plotted against the average for the award category.

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As we can observe from the chart for medium wheel loaders above, Volvo’s 5-year retained value was nearly 15 percentage points higher than the average for the category. Looking to the chart on the right, we can see that Toyota had a 5-year retained value close to 23 percentage points higher than its competition in the narrow aisle warehouse lift trucks category. 

For these two types of equipment the average retained value is under 40%, meaning that a $10,000 piece of equipment would be worth about $3,400 to 3,900 in five years. 

However, by using data to determine the makes and models with the better-than-average retained values, a firm could save themselves thousands of dollars. 
Machines with a higher retained value represent quality and give buyers confidence in their investment. A machine’s retained value also contributes to its total cost of ownership, which we will dig into a bit now.

Cost of Ownership

At its core, cost of ownership is the actual cost to own an asset per month, week, day, and hour. The ownership costs of depreciation, indirect costs, cost of facilities capital, and major overhaul are annualized and then adjusted to reflect the average annual working season to obtain a monthly ownership rate, from which weekly, daily, and hourly rates are determined. 

An equipment’s total cost of ownership is the associated costs over the life cycle of the equipment. Total cost of ownership looks beyond the initial acquisition price to consider the value and profitability of equipment. Many factors beyond the initial investment impact total cost of ownership. Anticipated costs, like insurance, tax and warranty, along with these other factors can affect total cost of ownership and eventually, a company’s bottom line:
• Acquisition costs of getting machines into a fleet 
• Operational costs, including scheduled maintenance, service, unexpected repairs, parts, and training
• Machine reliability for maximum uptime

Total Cost of Ownership Comparisons

Again, what do these ownership costs look like in practice? Below are two examples from EquipmentWatch’s 2021 LCO awards. In each we have hourly ownership costs from one example model from the winning brand plotted against the average for the category.

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In both charts above we can clearly see the hourly cost of ownership declining over the five years for both the average and the example models. The gap between a model from the winning brand and the category average is also quite obvious. Kubota secured the 2021 LCO award in the backhoes category and, while the award is for the brand overall and not one specific model, in the example above the selected model boasts about 19% lower cost of ownership compared to the category average across the five years. The chart to the right for electric scissor lifts shows an even more dramatic differential, with an example model from the winning brand of JLG flaunting ownership costs of about half of what they are for the category average. 

While both retained values and ownership costs are complex and multi-faceted topics, we hope this primer helped to illustrate the basics and what they look like “in the wild.” For more information on the 2021 HRVA winners click here and for the 2021 LCO award winners click here. 
 

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