12 Jan Establishing the Remaining Useful Life of Machinery and Equipment: The Factors Considered
A common request we receive from our bank clients is to include the machinery & equipment remaining useful life (RUL) in the equipment appraisal. This request often comes when a lender is looking to verify the remaining useful life of certain machinery & equipment to support specific loan terms (i.e. a 10-year term vs. a 5-7 year term). The remaining useful life for many types of machinery & equipment may range from 5-10+ years depending on a variety of factors. All of our equipment appraisals will include the estimated useful life of each equipment item as well as an overall range.
The normal useful life of commonly appraised equipment is outlined below:
Factors such as maintenance and operating conditions can have a significant impact on the age of an asset. For example, if a machine does not receive regular routine maintenance such as oil and filter changes, and the machine is operated in dusty or wet conditions, the effective age of the asset will likely be higher than the chronological age of the asset. Conversely, an asset that is operated less often than a similar asset performing the same function is maintained according to the manufacturer’s specifications, and is operated in ideal conditions, may have an effective age that is equal to or greater than the chronological age of the asset.
Another factor is the functional use of the asset. As an example, many manufacturing equipment items originally produced in the mid to late 1990s may still have several years of remaining useful life although when originally manufactured, the normal useful life was 15 years.
These adjustments will be illustrated in the examples below:
- A 5-year-old dozer has average operating hours, a regular maintenance schedule, and is in very good condition. With a normal useful life of 15 years, and after adjustments for condition, maintenance, and operating hours, it is reasonable to assume that the remaining useful life of the dozer is approximately 11 years.
- A 5-year-old CNC machine is in poor condition, is operated in dusty conditions, rarely cleaned, and is operated 24 hours a day. Assuming a normal useful life of 15 years for this particular CNC machine, and given the condition, the appraiser may determine a remaining useful life of this machine to be approximately only 5 years.
As demonstrated in the examples above, numerous factors go into establishing the remaining useful life. Feel free to contact our machinery & equipment appraisal team with any specific questions you may have regarding machinery & equipment’s useful life.
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