One of the first choices that buyers face is whether to buy a new vs. used grinder. If profit is a concern to you, then read on. Like cars, grinders depreciate rapidly in the first few years and many buyers realize too late that they have lost as much value on their new grinder as they made operating it. I believe that Grey Livingston said it best – “Driving a brand new car feels like driving around in an open billfold with the dollars flapping by your ears as they fly out the window.”
Although Grey was describing a new car, purchasing a new grinder would be more akin to tossing your billfold in the hammermill and watching as your money flies off the end of the conveyor in little bits. While municipalities are often required to purchase new machines, private operators most often are not and should really run the numbers before purchasing a new machine.
In order to quantify what a grinder will really cost you, I have put together a quick example based on typical financing costs and depreciation for a new vs. used grinder. If you want to see the full calculations see Figure 1.1 at the bottom of this post.
New Grinder Assumptions – For purposes of this example we will assume that the new grinder costs $650,000, and that financing is available at 8% for a period of 5 years. At the end of the loan we assume the grinder is sold at a reasonable fair market value of $250,000 based on typical depreciation observed in the market.
Used Grinder Assumptions – For purposes of this example we will assume that a used grinder (of similar size and horsepower as the new machine) costs $250,000, and that financing is available at 8% for a period of 5 years. At the end of the loan we assume the grinder is sold at a reasonable fair market value of $150,000 based on typical depreciation observed in the market.
Summary – For purposes of this analysis we are just looking at the Cost to Own, defined as the loss in value while you own the grinder (or depreciation) and the interested paid during that time.
|
Cost to Own |
New Grinder |
$563,983 |
Used Grinder |
163,071 |
Difference |
$400,913 |
That’s right, the new grinder will cost you $400,913 more to own over the 5-year period. The new grinder must generate $400,913 more in profit than the used grinder just to earn you the same profit as the used grinder. How is that possible? Let’s go through the details a little more.
COST OF INTEREST
Conclusion – The new machine actually will cost you $500,913 more than the used machine once you account for interest on the loan. What about the down payment? Well, we could reduce the actual amount financed by a reasonable down payment but operators should expect better than an 8% return on their money so that would actually make the interest difference between the two machines even greater.
COST OF DEPRECIATION
Conclusion – The new machine will cost you $300,000 more than the used machine accounting for depreciation, or loss in value while you own it. You can improve these numbers by maintaining your machine better, but that typically costs more and often offsets any real change in price at sale.
Real world example – A recent customer of mine purchased a new grinder in 2010 for $350,000. Unfortunately, the application that he purchased the grinder for never worked out. A year and only 200 hours later he decided to sell. After months of heavily marketing his grinder for sale, it sold for just over $200,000. That is nearly $150,000 in depreciation in the first year on a grinder that was hardly used. Said another way, approximately 40% of the value vanished in the first year.
OTHER CONSIDERATIONS
Buying a used grinder can have its own pitfalls as repairs can quickly get very expensive. However, it is very rare that you will encounter repair costs on a pre-owned grinder that exceed the depreciation you will experience in the first few years when purchasing a new machine. Looking at our previous example let’s assume you buy a used grinder for $250,000 that needs some work. Just looking at some of the bigger expenses you could possibly encounter: Engine overhaul - $35,000; Replace dry clutch - $12,000; Refurbish hammermill - $20,000; Replace belts, hoses, fix leaks, etc. $10,000. Total - $77,000, far cry from the $400,913 difference in profit that the new machine must earn above the used machine. Also, this is really a worst case scenario. A quick inspection should allow you to avoid many of these costs if not all when purchasing a used machine; or at least negotiate the price down to compensate for the needed repairs.
There are other considerations of course such as (downtime, availability of used machines, dealer help). Anybody that has been around grinders can tell you that you will have downtime with both new and used machines. In the used market, the key is to fully inspect any equipment before purchasing and understand its maintenance and history. “When buying a used car, punch the buttons on the radio. If all the stations are rock and roll, there’s a good chance the transmission is shot. ~Larry Lujack. With grinders history is important. If possible, find out where and how the grinder was used before. That may tell you as much about the condition as your inspection.
Warranties – an advantage of purchasing a new machine? Yes and No. Yes you have insurance that the manufacturer will cover certain malfunctions or defects, but it is insurance that you have paid for whether you use it or not, and it rarely makes up for the loss in value you will experience during the first few years of ownership.
How used is used-up? The answer to this question varies significantly for each customer and depends greatly on factors such as:
SUMMARY
If you have any additional questions, or would like any assistance in deciding whether a new or used machine is right for your operation please free to contact for additional support.
Figure 1.1