Overhaul occurs when equipment is removed and replaced. However, the cost of replacing equipment is not merely the cost of the new equipment. It is also the loss in value of the existing equipment as well as the cost to remove the old to make room for the new. Knowing the cost to overhaul is essential to make the best decision of whether to repair, replace or upgrade equipment.
Identify the make, model and serial number of the equipment. You will need this information to research the present realizable salvage value of the equipment.
Determine the present realizable salvage value of the equipment. This value is determined by examining the physical condition of the item. MacRae's Blue Book is the industrial equivalent of the Kelley Blue Book for the automotive industry. However, an independent appraisal may be necessary to get this value.
Request quotes for the cost to overhaul the equipment. Seek at least three quotes from a list of reputable replacement equipment vendors.
Average the quotes for the cost to overhaul the equipment. This value will be used as the base cost to overhaul.
Determine if there is a cost for equipment removal. For example, this can include the cost of a crane or hoist to remove the equipment or a truck rental to transport the equipment to a potential seller. If there are additional removal costs, add this amount to the "total cost to overhaul" as this is an additional cost to complete the overhaul.
Subtract the total cost to overhaul from the present realizable salvage value of the item. The result is the complete overhaul cost.
The cost of the new equipment and removal of the old equipment minus the present realizable salvage value can be a negative value, indicating the loss incurred when taking out the old and installing the new.
If the replacement equipment increases the production throughput of an assembly line, this is an additional benefit that offsets the cost of removing the old equipment.
If there is a time value of money due to inflation or rapid equipment depreciation, the optimum time for overhaul can be calculated. According to Heinz Bloch and Allan Budris, authors of “Pump User's Handbook,” the equation to determine this optimal time is as follows: Multiply two times the cost of overhaul and divide this value by the cost rate of deterioration. Take this result and determine its square root. That value is the optimal time to replacement the equipment.
The overhaul cost of equipment calculation does not take into account tax breaks available for some equipment purchases. The tax effect can be calculated by subtracting the book value from the salvage value received and then multiplying the difference by the tax rate. This calculation also does not take into account the possible differential in utility rates, such as when new equipment requires more electricity to run.
- “Predictive Maintenance of Pumps Using Condition Monitoring”; Raymond Beebe; 2004
- “Pump User's Handbook”; Heinz Bloch and Allan Budris; 2004
- “STEP Project Management: Guide for Science, Technology, and Engineering Projects”; Adedeji Badiru; 2009
- “Asset Maintenance Management”; Alan Wilson; 2002
- “Cost Management: Accounting & Control”; Don Hansen, Maryanne Mowen and Liming Guan; 2007
- “Wiley CPA Exam Review 2011”; Patrick Delaney and O. Ray Whittington; 2010