When buying or renting equipment, there are many things that you need to consider. One of the essential aspects of the equipment is its life estimate. There are two ways to estimate the economic life of a physical asset, from a financial accounting perspective:
- Physical Life
- Economic Life
It’s important to understand these life estimates to ensure you aren’t losing money with your equipment. That’s why we’ve decided to give you a bit more information about the economic life of the equipment and what it means.
What is Equipment Economic Life?
In simplest terms, equipment economic life is the period during which your equipment will be useful. That’s why it’s also referred to as “Useful Life”, where the usefulness of equipment is defined by its profitability. Economic life can be measured multiple ways:
- In Hours (most common when calculating the cost per hour)
- In Months
- In Years
The physical and economic life of a piece of equipment is often different. Some assets can still be functioning but are simply no longer profitable. On the other hand, economic life might still be active, but the asset can break down completely.
How is Economic Life Calculated?
It’s very difficult to calculate the exact equipment economic life. It takes into account many different factors, a lot of which can’t be calculated or predicted that easily. A lot of time, work, and resources are required to calculate equipment economic life.
Unless your use case for economic life is incredibly detailed and scientific, we recommend using already-established benchmarks. A few sources of economic life hours for equipment include:
The standards above are more specific than general GAAP economic life standards, used in financial accounting.
How You Can Use it
Estimated equipment economic life can help you calculate the profitability and stability of your business. It helps you understand your balance and income statements. It can also help you predict future replacement and maintenance costs.
It can also help establish and manage your maintenance program. More specifically, you will be able to do better preventive maintenance that helps you anticipate and prevent equipment from breaking down completely.
In the end, with equipment economic life estimate, you’ll be able to calculate the current market value of your used asset, as well as its residual value.
Conclusion
Equipment life is essential for your maintenance program and keeping your business profitable. With it, you will be able to use your equipment efficiently and safely.
