Production equipment typically has a useful life of 10 years or more. Buying it uses limited financial capacity. A business owner may not be thrilled about replacing expensive and functional existing equipment. But only a portion of the expenditure can be recovered from selling it. Instead, ask how well the equipment meets your needs. Is it outdated? You'll need to consider the following aspects.
- Is it part of a production system?
- How well does it fit into that system?
- Is there a constraint on capacity that may lead to imbalanced flow through the system?
- How well would new equipment fit into the system?
- Would new equipment require other changes to be made?
Over its lifetime, the costs of operating equipment are usually much more than the cost of buying it. If the equipment is old, it may require more operating labour and maintenance than a new model and it may not be very energy-efficient.
Even though it may be in good condition and productive, your equipment may still represent a disadvantage if competitors are using newer technology that produces better output at lower cost. Or, if the competitors are still using old technology, perhaps you can gain an advantage by buying new equipment.
If you have equipment that is idle most of the time, it is not providing a good return on the capital invested in it or the space used to accommodate it. New equipment with better capabilities might be used more and offer a better return.
Remember, ultimately you are asking, “Will it increase production capacity or improve productivity or output quality? How will the benefits compare with the expected cost?”