Guide 6 · Residual values

What your machine is worth in year three, and why it changes the rate

Reading time about 8 minutesUpdated August 2026Worked example included

Book depreciation and market value are not the same thing

Your accountant depreciates the machine on a schedule — straight line over seven years, or a declining balance at whatever percentage the tax code allows. That schedule exists to allocate cost across periods and to calculate tax. It is not a forecast of anything.

The market does something quite different. A machine loses a large slice of its value the moment it becomes second-hand, then declines at a fairly steady percentage each year, with the percentage set by how many buyers exist for that type of machine, how long it physically lasts, and how quickly the technology in it dates.

When you set a rental rate, only the second number matters. The rate has to recover the difference between what you paid and what you will really be handed on disposal day. If your model uses the book figure, or worse a comfortable round number somebody typed in once, the rate is wrong from the first day and stays wrong for the whole hold.

The shape of the curve

Used equipment values follow a declining balance far more closely than a straight line: a roughly constant percentage comes off the remaining value each year, not a constant number of dollars. That is why a machine loses more in its first year than its fourth, and why the last few years of a long hold are comparatively cheap to own.

The percentage varies a great deal by family. Machines with long physical lives, a deep international second-hand market and little technology in them hold value best. Machines that are cheap to replace new, or that date quickly, fall fastest.

These are the default curves the calculator uses, and they are starting points, not gospel. A well-maintained machine with low hours and full service history sits above its curve; a hard-worked unit with 8,000 hours and a tired undercarriage sits below it. Local conditions matter enormously too — coastal salt, sand, altitude, and whether there is an export market on your doorstep.

Why year three is the number that changes your rate

Most rental fleets are held three to five years, so the year-three or year-five value is what the whole rate calculation rests on. And because depreciation is usually the single largest cost of owning a machine, an error here does not just move the rate a little — it moves it more than any other input.

What actually moves a machine's residual

• Hours, not years. Two identical five-year-old excavators with 2,000 and 7,000 hours are not the same asset. On many machine types hours are the first thing a buyer looks at and the biggest single adjustment.
• Service history. A complete, documented record is worth real money, often more than the cost of the services themselves. It is the cheapest residual value you will ever buy.
• Brand and dealer network. A machine whose parts and service are available everywhere sells to a much wider pool of buyers. A niche brand can be excellent and still fetch less, because fewer people will take the risk.
• Specification. The common specification sells fastest. Unusual options rarely return what they cost, with the exception of things that widen the buyer pool — quick couplers, standard attachments, road registration.
• Emissions and regulation. A machine that cannot be sold or operated in a major market because of an engine standard loses a large slice of its buyer pool overnight. This is the risk that catches people out, because it does not show up gradually.
• Where you can sell it. Access to an export market changes everything. Fleets near a port routinely realise more than fleets three hundred miles inland for identical machines.
• The state of the new-machine market. When new lead times stretch, used prices spike; when new inventory floods back, they fall. This cycle is real, it is not forecastable, and it is a good reason to be conservative rather than to extrapolate the last good year.

Build your own curve — it takes an afternoon

You almost certainly have better data than any published table, because you have sold machines. Do this once:

1. List every machine you have disposed of in the last five years: model, purchase price, purchase date, sale price, sale date, hours at sale.
2. For each, work out the ratio of sale price to purchase price, and the age in years.
3. Convert each to an annual decline rate with the formula 1 − (sale ÷ purchase) ^ (1 ÷ years). A machine bought at $48,000 and sold at $20,000 after five years gives 1 − (0.4167)^0.2 = 16 per cent a year.
4. Group by family and take the median, not the average — one unusually good or bad sale should not set your pricing for a whole class.
5. Where you have no history, use the table above and mark it clearly as an assumption so the next person knows it was never verified.

Then put the resulting percentages somewhere everyone uses, and revisit them annually. Residual assumptions are the part of a rental model that quietly goes stale, because nothing forces you to look at them until the machine is sold and it is far too late to change the rate.

Feeding it back into the rate

Once the residual is honest, the rest follows mechanically. Depreciation per year is the purchase price minus the expected resale, divided by the years you will hold the machine. That goes into total annual cost alongside interest, maintenance, insurance, registration and overhead, and the total divided by your expected days on hire is the breakeven day rate. Everything above it is margin. The full method is here.

One last discipline, and it is the most useful thing in this guide. When the calculator gives you a return, look at how much of it comes from the sale rather than from renting the machine out. If most of the profit arrives on disposal day, you are not running a rental business, you are running a used-equipment trading business with a hire desk attached — and you are exposed to a market that can move twenty per cent in a year for reasons that have nothing to do with you.

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