The Purchase input part has described the original circumstances of obtaining the machine. The following Sale input part defines the scenario that the user creates for an anticipated present or future sale of the machine. Two applications of residual value prediction have been introduced in Section 1.8. Calculations for either of the two approaches as shown in Figure 5.2 can be performed using the RVC because the mathematical model for them is the same.
Figure 5.2: Applications of Residual Value Prediction
5.2.2.1 Input 4: Date
Input 4 requires the user to specify the anticipated month and year of the sale. Both month and year have to be entered in the format MM-YYYY for correctly calculating the inflation correction. Should only a year be entered, EXCEL incorrectly converts this to the number of days
that have passed since January 1, 1900. The earliest date can be January 1, 1965 to avoid equipment manufactured prior to 1950 for which no inflation correction data were available. The latest date can be December 31, 2020 to avoid excessive extrapolation. An error message as shown in Figure 5.3 will be displayed should the date be outside these boundaries.
Past Present $ RV LP Value Loss T Present Future $ RV LP Value Loss T t t
Figure 5.3: Invalid Entry for Year of Original List Price
5.2.2.2 Input 5: Condition Rating
Input 5 asks the user for the condition rating of the particular machine at the time of its sale. Six levels are possible: 6 = New, 5 = Very Good, 4 = Good, 3 = Good, 2 = Fair, and 1 = Poor. While these levels are represented by a numerical value, an actual quantitative measure for condition rating does not exist. The hierarchical order among these categories is not considered in the calculations, as explained in Section 4.2.7. The number of the chosen condition rating is automatically converted to binary numbers by the RVC. More information about determining condition ratings is available from equipment appraisers, who use standard checklists to examine the parts of a machine and determine its overall condition rating. Table 5.3 presents the original definitions used by the equipment auction firms from whom data for this study were obtained.
Table 5.3: Definitions of Condition Ratings
Condition Rating
Green Guide™
Auction Reports Last Bid
® Top Bid
New N/A New unit low or no hour machine
Excellent Has seen very little or limited use. Some use, but almost new mechanically low hours, very little use
Very Good
Above average condition; may have been
overhauled or may or may not have had enough use to require overhaul.
In above average mechanical condition; low hours or recently overhauled
above-average condition
Good
Average condition, with no known defects except as noted; in operating condition, but may need some repair or parts replacement soon.
In average mechanical condition; may need minor repairs or
replacement of worn parts soon
an average piece of equipment, may need minor repairs
Fair
Has seen considerable service and may require repair or replacement of worn parts.
In below average mechanical condition; high hours or older unit
has been in service for a considerable time, may need repairs
Poor
Has seen hard service; needs repairs to be reliable, and may not be operational.
Needs major repairs has undergone extensive service, may need repair, or be inoperative
Verified N/A
Verified. Auction attended by
EquipmentWatch field agent who verifies Make, Model, Serial Number and Condition.
N/A
(-) N/A
(dash) Non-Verified. Data provided by Auctioneer. Erroneous transactions are corrected or omitted from database.
N/A
Sources: Primedia 1999, pviii, <http://www.ironmax.com>, <http://www.equipmentworld.com>.
5.2.2.3 Input 6: Auction Region
It is then necessary to enter the region in which the sale is anticipated to take place in Input 6. One of five regions can be chosen. Four of these are identical to the Census regions in the U.S., 1 = Northeast, 2 = South, 3 = Midwest, and 4 = West. An own region has been defined for 5 = Canada. Table 5.4 contains a list of these five regions used in the RVC and the individual states that the U.S. regions are composed of. The user can refer to this list in worksheet 2 – Tables by clicking on the button next to the input cell. Numbering the regions does not imply any quantitative measure. As for the condition rating the numbers are only used for identification. A hierarchical order among the regions does not exist. The number of the chosen region is automatically converted to binary numbers by the RVC.
Table 5.4: List of Regions
Census Region
and Canada Number States
Northeast 1 CT, MA, ME, NH, NJ, NY, PA, RI, VT
South 2 AL, AR, DC, DE, FL, GA, KY, LA, MD, MS, NC, OK, SC, TN, TX, VA, WV Midwest 3 IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI
West 4 AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY Canada 5 All Provinces and Territories
5.2.2.4 Input 7: Age
Age in calendar years at the time of sale is Input 7. It is counted from the year of manufacture and is limited to a maximum of 15 years for two reasons. The original data used to determine the coefficients for the prediction model spanned a range of 15 years, as older equipment was assumed to be relatively rare and also to have higher variance of the residual value. A warning
cautions against using ages larger than 10 years. Extrapolation needs to be performed carefully and will be less accurate the further into the future it reaches. This particularly applies to forecasting the inflation-corrected (Input 8) economic situation as captured through the economic indicators (Inputs 9 and 10).
Considering the two applications of residual value prediction mentioned in Section 5.2.2, age is defined as the calendar years that a machine has now, if the RVP shall be predicted for the present time, and it is defined as the calendar years that a machine will have later, if the RVP shall be predicted for a future time. Age can be used to adjust for above or below average use of the machine. If the user notes annual hours of use do not concur with industry averages as published in trade journals such as e.g. Construction Equipment, the age in calendar years can be decreased or increased proportionally.