Value Model of Used Equipment: Market Trap for Gain

Abstract

There is a belief that the acquisition of new industrial equipment is less profitable than the purchase of used equipment. The ground for this effect may be found in rather significant decline of the price of industrial equipment after the first years of acquisition. Well known that the car price falls down by 20% - 30% during the first year of ownership. For industrial equipment, the price does not fall so fast, but this effect is observed too. The article considers the profitability of purchasing of used equipment in the framework of Preserved Value Approach. The findings suggest that used equipment is indeed usually priced below its value. This effect provides the buyer of used equipment with an additional benefit, the value of which depends on the actual interest rate of the buyer. Moreover, the buyer may choose a strategy for extending the period of value-added use beyond the limits of economic life. In this case, the purchase of used equipment becomes especially profitable. The reason for this effect seems to be the existence of some “market punishment” for the owner, who acquired industrial equipment but is not able to use it effectively.