Are you tired of equipment breaking down unexpectedly or costing you more than it’s worth in maintenance? The solution may lie in understanding the useful life of your assets. Computerized maintenance management systems (CMMS) can be a great tool for tracking useful life and optimizing maintenance schedules to extend asset life spans.

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This Article Covers:

• What Is Useful Life?
• Importance
• How To Determine
• Affecting Factors
• How To Calculate the Depreciation of an Asset
• Best Practices To Extend the Useful Life of Assets
• Next Steps

What Is Useful Life?

The useful life of an asset is the period of time during which the asset is expected to provide economic benefits to its owner. This can vary depending on the nature of the asset, how it’s used and the industry.

For example, you can estimate the useful life of a piece of machinery based on factors such as its expected wear and tear, the frequency and intensity of its use, and the technology involved. On the other hand, the useful life of a building might depend on factors such as its design, materials and location.

The useful life of an asset is important in accounting and financial management as it determines how you should depreciate the asset (e.g., gradually written off over time) for accounting and tax purposes.

Accurately estimating the useful life of assets is also important for budgeting, financial forecasting and decision-making about when to repair, replace or dispose of assets.

Importance

Understanding an asset’s useful life is crucial for several reasons.

First, it helps you budget and forecast finances. Knowing when an asset will reach the end of its useful life helps you plan and budget for its replacement or upgrade.

Second, understanding an asset’s useful life can help you make informed decisions about maintenance and repairs. By tracking an asset’s age and usage, you can anticipate maintenance needs and avoid breakdowns that can cause costly downtime and repairs.

Third, understanding an asset’s useful life can help you optimize asset use. By knowing when an asset is likely to become obsolete, you can plan to upgrade it before it becomes a liability.

Finally, there are compliance purposes. For example, in accounting, the useful life of an asset is used to determine the period over which it should be depreciated.

How To Determine an Asset’s Useful Life

Determining the useful life of an asset involves various factors, including its design, materials, usage and maintenance history.

Here are some common methods for estimating an asset’s useful life:

1. Review Manufacturer’s Specifications: Many assets come with a manufacturer’s estimate of their useful life based on design and materials used.
2. Check Industry Standards: Some industries have established standards for estimating useful life based on historical data and usage patterns.
3. Maintain Maintenance Records: Tracking maintenance and repair history can provide insight into an asset’s durability and longevity, especially if you have multiple assets of the same type.
4. Conduct Physical Inspections: Inspecting an asset for signs of wear and tear, corrosion, and other forms of damage can indicate its remaining useful life.
5. Consult Experts: Seeking the advice of a qualified expert, such as an engineer or equipment specialist, can help you estimate an asset’s useful life.

Once you’ve determined an asset’s useful life, it’s important to track its age and usage over time to ensure proper maintenance and maximize its use.

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Affecting Factors

Several factors can influence the useful of an asset, including:

1. Maintenance: Regular preventive maintenance can extend the useful life of an asset, while poor maintenance can decrease it.
2. Quality: The quality of the asset and the materials used in its construction can impact its useful life. High-quality assets are likely to last longer than those of poor quality.
3. Usage: The frequency and intensity of an asset’s use can impact its useful life. Heavy usage can cause wear and tear on an asset and decrease its useful life quicker than gradual or infrequent use.
4. Environment: The environment in which an asset operates can also affect its useful life. Exposure to extreme temperatures, humidity and corrosive materials can all impact an asset’s durability.
5. Technological Advancements: Technological advancements may make an asset obsolete sooner than expected, reducing its useful life.
6. Upgrades and Modifications: Upgrades and modifications to an asset can extend its useful life, but they can also shorten it if not performed correctly.
7. Economic Factors: Changes in the market or the economy can impact the useful life of an asset. For example, a downturn in the market may make it more difficult to maintain an asset, leading to a shorter useful life.

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How To Calculate the Depreciation of an Asset

Depreciation is the method of spreading the cost of an asset over its useful life.

It’s important to note that depreciation is an accounting method used for financial reporting purposes and doesn’t necessarily reflect the actual decrease in an asset’s value over time. It’s also important to consult with a financial professional for guidance on which depreciation method to use for your specific business and asset type.

Here are some common depreciation methods:

Straight-line Depreciation

The straight-line depreciation method assumes that the asset will depreciate at a constant rate over its useful life. To calculate the annual depreciation expense, divide the cost of the asset by its useful life in years.

(Purchase Price – Salvage Value) / Useful Life = Annual Depreciation

For example, if an asset costs $10,000 and has a useful life of 5 years, the annual depreciation expense would be $2,000 ($10,000 divided by 5).

Accelerated Depreciation

Accelerated depreciation allows for a larger depreciation expense in the early years of an asset’s life and a smaller expense in later years.

One example of accelerated depreciation is the double-declining balance method, which takes twice the straight-line rate as the annual depreciation rate. For example, if an asset has a useful life of 5 years, the straight-line rate would be 20% per year, but the double-declining balance rate would begin at 40% per year.

Units-of-Production Depreciation

The units-of-production depreciation method assumes that the asset will depreciate based on the amount of usage or production it undergoes. To calculate the annual depreciation expense, divide the cost of the asset by its total expected units of production and then multiply that amount by the actual units produced during the year.

Best Practices To Extend the Useful Life of Assets

Extending the useful life of assets can help organizations maximize their return on investment and reduce the need for costly replacements.
Here are some best practices for extending the useful life of your assets:

• Develop and Follow a Maintenance Plan: Regular maintenance can help prevent breakdowns and prolong the life of assets. Develop a preventive maintenance program that includes regular inspections, cleaning and repairs and ensure that your team follows it consistently.
• Use High-quality Replacement Parts: When replacing parts on an asset, use high-quality replacement parts that are designed for that specific asset. This can help ensure that the asset functions properly and has a longer life span.
• Train Employees: Proper use and maintenance of assets is essential for prolonging their useful life. Train employees on the proper use, maintenance and care of assets to help prevent damage and extend their lives.
• Monitor Asset Performance: Regular monitoring of asset performance can help you identify issues early and prevent costly breakdowns. Use a CMMS or other monitoring tools to track asset performance and identify any potential issues.
• Consider Upgrades: Upgrading assets with newer technology or features can help extend their useful lives and improve performance. Consider upgrades when it makes financial sense to do so.
• Evaluate Asset Life Span: Use asset life cycle management to evaluate asset life spans and determine when it makes financial sense to replace them. Replace assets before they become a liability or a safety hazard.

By following these best practices, organizations can extend the useful life of their assets, reduce downtime and maintenance costs, and improve their return on investment.

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Next Steps

Understanding the useful life of assets is crucial for any organization seeking to maximize return on investment.

By implementing depreciation calculations, enhancing tracking and monitoring, and adopting best practices for maintenance and repairs, companies can extend the life spans of their assets and reduce the need for costly replacements.

Regularly reviewing the useful life of assets and adjusting maintenance schedules accordingly can also help you ensure optimal performance and safe operation.

To take the next steps towards maximizing asset usage, consider implementing a CMMS system. Check out our free comparison report for a side-by-side look at how leading products score across nearly 100 features.

What steps have you taken in your organization to maximize the useful life of your assets, and what challenges have you faced in the process? Let us know in the comments below.