What is Equipment Depreciation? Why it Matters + How to Calculate
What is equipment depreciation and why is it important?
Equipment depreciation is a measure of how much a piece of equipment drops in value each year. As you calculate the depreciation of your assets, you can make wiser maintenance decisions, particularly for older equipment.
3 factors in determining equipment depreciation
Equipment depreciation is based on the following information:
- The initial value of the asset
- Its useful life (the number of years it takes to fully depreciate)
- Its salvage value
Basically, an asset keeps depreciating until it reaches its salvage value, at which point you might sell it or scrap it. The useful life of an asset could be based on either manufacturer information, user estimates, or values assigned by the IRS.
How to calculate depreciation on equipment
The simplest way to calculate equipment depreciation is with the straight-line method:
(Initial Value – Salvage Value) ÷ Useful Life = Annual Equipment Depreciation
So if an asset costs $9,000 at the start, has a salvage value of $2,000, and has a useful life of 7 years, your depreciation would be:
($9,000 – $2,000) ÷ 7 years = $1,000/year
That means each year, your equipment is worth $1,000 less than the year before.
Knowing the worth of your equipment
As you plan maintenance tasks on your equipment, it helps to know how much of your time and money you should pour into them. Tracking the depreciation of your assets helps you keep a clear idea of just how much your equipment is worth.
On older pieces of equipment, it may not always be worthwhile to repair it when it fails. If the cost of repairs would be more than its current value, it may be a good idea to replace it instead of fix it.
In addition to the raw value of the asset, depreciation is used when calculating taxes. Organizations can write off the depreciation of their equipment as a business expense, so it could help lower their tax exposure.
That fact has implications for maintenance planning as well—if you’re no longer able to claim tax benefits from an asset, it might be less worthwhile to keep maintaining it.
Depreciation in maintenance planning
In order to get the most out of depreciation, you’ll need to keep track of it on each asset. Some types of software systems can help you do that.
Using depreciation as one of your metrics, you’ll be able to determine the most financially efficient course of action regarding older assets.