Some companies use the same rates for depreciation in their financial statements as they do for calculating Capital Cost Allowance (CCA) for income tax purposes. But those rates may bear no relation to the actual depreciation of the assets.
Two companies may buy the same type of equipment and depreciate it at the same rate. But one company may run it constantly and not have an adequate maintenance policy, while the second may use it sparingly and have a very good preventive maintenance policy.
A fair price
The book value of both pieces of equipment would be the same, but obviously the latter would have a higher value than the former. The only fair price is current market value which can be determined by a qualified appraiser.
If you’re buying used vehicles, there are guides that indicate current values. For more specialized equipment, try going to the manufacturer and getting estimates of value. An experienced industrial auctioneer can also provide reasonable estimates.
Once you’ve agreed on a fair price for the equipment, you will probably want to sign an equipment purchase contract with the seller.
What to look for in a purchase contract
When reviewing a contract, you should first ensure the equipment described is in fact what you want to purchase. Also, check that payment terms and conditions are clearly stated.
You should also make sure the responsibilities of both the buyer and seller are well described. When purchasing production equipment, determine whether the seller includes assembly and start-up in the purchase price.
Verify any applicable hourly rates or other expenses. Lastly, identify the remedies to which you’re entitled in the case of minor or major problems with the equipment.
A consultant can help
It’s a good idea to use a professional with extensive knowledge of the equipment you wish to purchase. In fact, you should obtain professional advice from the very start of the project, rather than waiting until you’re ready to sign an equipment purchase contract.