When should I repair or replace an asset?
In order to decide if it is time to repair or replace an asset, you must compare the current value of the asset with the cost of repair. Simply, when the cost of repair is less than than the value of that piece of equipment, you should repair it. When the cost of repair is higher than the value of the asset, you should replace it.
Asset value and depreciation
In order to make a wise decision about repairing or replacing an asset, you first need to determine the value of your asset today.
To do this, you calculate the equipment depreciation. It’s easiest to calculate the depreciation using the straight-line method, meaning that the asset loses the same amount of value each year. To find the equipment depreciation you use:
Initial Value ÷ Useful Life = Annual Equipment Depreciation
Here, the initial value is the price you paid for the asset at purchase. The Its useful or expected life is the number of years the asset will remain profitable in service.
Next, you’ll need to determine the remaining value of the asset. In other words, you’re following the straight-line depreciation model to find out where you are and how much value is left in your asset. To find this number, multiply the depreciation rate by the number of years left in its useful life.
Annual Depreciation x Number of Years in Left in Useful Life = Remaining Asset Value
Now, you’re ready to compare the cost of repair with the present (remaining) value of the asset to decide if it’s time to repair or replace.
Let’s look at an example
I purchased an asset for $100,000 with a salvage value of $10,000 and an expected lifetime of 10 years. Using a straight-line depreciation model, the asset loses $10,000 in value every year for its 10-year lifespan.
$100,000 ÷ 10 years = $10,000/year
Now, I’ve had this asset for seven years and it has just broken down. Should I repair it or should I replace it?
We know that the cost of replacement is $100,000 to buy a new one that will last me 10 more years. My asset broke down with three years of expected life left, making its present value $30,000. I will use the present as my point of comparison, once I know the cost of repair, to decide whether I should replace or repair my asset.
If the cost of repair is under $30,000, I should fix it because my original asset will then last for three more years. If the cost of repair exceeds $30,000, however, I should just replace it.