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
That’s right, the new grinder will cost you $400,913more to own over the 5-year period. The new grinder must generate $400,913 more in profitthan the used grinder just to earn you the same profitas the used grinder. How is that possible? Let’s go through the details a little more.
COST OF INTEREST
- At an interest rate of 8% your New Grinder that costs $650,000 (over 5 years) will cost you $163,983 of interest. As a result, you will actually pay $813,983 in total for the machine.
- The used grinder at $250,000 over the same 5 year period will cost you less than $63,071 of interest, or $313,071 total.
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
- Our example assumes that the new grinder will depreciate over the 5 years from $650,000 to $250,000 assuming average hours and condition (a reduction of $400,000). Sound unreasonable? Well, it’s not, in fact we based our assumptions off of market observations and known sales in the secondary market. There are some used machines that may sell for more, but they typically have additional value such as factory overhauls, or warranties attached which inflate the price.
- Our example assumes that the used grinder will depreciate over the 5 years from $250,000 to $150,000 assuming average hours and condition (a reduction of $100,000). Again we based our assumptions off of market observations and known sales in the secondary market. Note, as grinders age the resale value becomes more variable depending greatly on the overall condition of the machine.
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.
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:
- Brand and Construction of the grinder – Larger, well-built grinders simply hold-up better. Peterson, Diamond Z, CBI, and Morbark all have reputations for durability.
- History and Maintenance is key! How the grinder was run during those hours will have a significant impact. Machine used for pallets, tree-tops and limbs, leaves, bark or re-grind will likely be in the best shape. Machines used for land-clearing and/or logging, shingles or tires generally have the most wear and tear.
- Your ability and willingness to make repairs – For some customers 5,000 hours is too much, while other customers look for a great deal on a 10,000 hour machine that they can repair themselves. Each buyer has to decide for themselves their acceptable limits of repairs and downtime. Many operators prefer older machines (which like your old chevy truck) are much easier to work on and repair in the field. However, the technology built into the newer machines permit much higher production rates and better fuel economy. You will have to decide what is more important to you. If you are grinding on-site, high-production and limited down-time are generally very important. If you are operating in your own yard, or can take a little more time grinding, then accepting a slightly lower production machine can save you significantly when purchasing a grinder. Manufacturers and Dealers are available to help you with new and used equipment although some manufacturers have gone out of business or changed names over the years. Most grinder parts are off-the-shelf anyways and there are a variety of companies that provide replacement parts so getting a discontinued brand can be a great way to save money on a grinder if you are willing to spend a little more time finding parts.
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.