There are few universal truths. But one of them is that any maintenance manager would like to be a psychic. To know when a breakdown will happen, when that battery needs changing… and how long each piece of equipment will last. Unfortunately, none of us has the power to predict the future. So, we are left to wonder how to determine an asset’s life expectancy.
What is the useful life of an asset?
First, we need to distinguish “useful life” from “longevity”. The useful life corresponds to the period of time when the asset is expected to reach its maximum performance. However, it is possible for it to remain operational even after this period. Just think, there are still VW Beetles from the 1960s circulating on the roads because their owners invest in repairs and maintenance.
As time goes by, it is normal that the equipment requires more and more maintenance and, eventually, a complete renovation. Sometimes, this is enough to ensure functionality and can even be more cost-effective than buying new equipment. On the other hand, functional equipment that breaks down frequently may not be reliable.
So, neither is the definition of “service life” as obvious as we might think, nor is the answer as straightforward as we would like. But, briefly, we can look at the question from two different perspectives:
- From an asset management perspective, the useful life of an asset corresponds to the period in which it is usable.
- From a financial and accounting perspective, it corresponds to the period of time when it generates economic benefits for the company.
In more detail: what are the four phases of asset life cycle?
At this point, it is pertinent to pause for a moment to better understand the life cycle of assets. The asset life cycle is divided into 4 distinct phases:
Planning ⟶ Acquisition ⟶ Operation & Maintenance ⟶ Disposal
1. Planning is the phase when we realise there is a need and consider the purchase. For example, how much time can we save if we implement a Maintenance Platform that automatically assigns faults to a technician?
2. The second phase is absolutely pragmatic. Before making a decision, various suppliers are compared, the ROI of each option is calculated, the available capital is assessed, and any necessary customisations are discussed with the chosen supplier.
3. Finally, the equipment is in use and has a positive impact on the company’s operational performance and profits. It requires monitoring and maintenance, the need for which increases over time. This phase is represented by the bathtub curve (highly recommended reading).
4.At the end of its life – and depending on whether we are talking about its useful life or total loss of functionality – it can be sold, refurbished, recycled, sent to a landfill, and replaced. As the circular economy advances, it is increasingly likely that the ‘end’ will never be a definitive end.
How to calculate an asset’s life expectancy
There is no formula or universal mathematical model to calculate the useful life of an asset. Not least because the useful life of the asset depends on how often it is used, the conditions it is exposed to (humidity, temperature, among others), and the quality of maintenance throughout its useful life. To make an estimate of the useful life of an asset, you can consult:
- The manufacturer’s information: manufacturers can provide data that allows you to estimate the useful life of the asset. The information is not always in years, but rather in hours of use, number of cycles or usage. Based on this information and your intended use of the piece of equipment, make your own calculations.
- History of similar equipment: another reliable source of information to calculate the useful life of assets is the history of similar equipment. This information is especially interesting because it allows you to calculate the useful life based on actual use and not just on a theoretical basis.
- Adjust annually: a forecast… is always a forecast. If there are frequent failures, and you are no longer achieving the expected performance, review your estimates. If the asset’s technology is becoming obsolete (e.g., because it does not connect to the Internet of Things, or because it will no longer meet legal requirements) you should also take this into consideration.
Why is it so important to know the useful life of an asset?
One of the decisions maintenance managers most often have to make is to repair or replace. But making that decision without knowing the useful life of an asset (or the expected useful life of an asset) can be a shot in the dark. Let’s see:
- If an asset at the end of its useful life has a serious breakdown that requires a very expensive repair, is it worth repairing? Possibly not. Instead of applying the money without any guarantee of return, you can apply it to new equipment, which has a much longer useful life.
- If an asset at the end of its useful life is still functional but needs a refurbishment to continue to perform well, you need to evaluate the economic part. Does it continue to bring economic benefits to the company, using our second definition?
⚙️ Learn how to calculate depreciation on maintenance and return on fixed assets.
However, this is not the only advantage of knowing the assets’ useful life. Knowing better the life cycle of assets, as well as their different phases, has other advantages:
- better planning of the maintenance of each piece of equipment and choosing the right strategy for each moment;
- identifying trends to plan the purchase of new equipment and securing the investment;
- ensuring that all equipment complies with all quality, hygiene, and safety rules.
⚙️ Check here how to choose the right maintenance strategy for each asset with just 4 questions.