Calculate an hourly or daily equipment rental rate from purchase price, salvage value, useful life, annual costs, utilization, and profit margin.
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Equipment Rental Rate Formula
The following two example problems outline the steps and information needed to estimate an equipment rental rate based on annual ownership and operating costs, expected utilization, and a desired profit margin.
ERR = \frac{\left(\frac{PP - SV}{UL} + FC + INS + TL + MR + FU + ST + TR\right)\left(1 + \frac{PM}{100}\right)}{N}- Where ERR is the Equipment Rental Rate ($ per rental period, e.g., $/hr or $/day)
- PP is the purchase price ($)
- SV is the salvage value ($)
- UL is the useful life (years)
- FC is financing costs ($/year)
- INS is insurance ($/year)
- TL is taxes and licensing ($/year)
- MR is maintenance and repairs ($/year)
- FU is fuel and utilities ($/year)
- ST is storage ($/year)
- TR is transportation ($/year)
- PM is the desired profit margin (%)
- N is the expected rental utilization per year (hours/year if hourly, or days/year if daily)
To calculate an estimated rental rate, first compute total annual costs (including depreciation and annual expenses), apply the desired profit margin, and then divide by expected annual utilization (hours per year or days per year).
How to Calculate Equipment Rental Rate?
The following example problems outline how to calculate Equipment Rental Rate.
Example Problem #1:
- First, determine the equipment ownership and operating inputs.
- Purchase Price (PP) = $50,000
- Salvage Value (SV) = $10,000
- Useful Life (UL) = 5 years
- Financing Costs (FC) = $2,000/year
- Insurance (INS) = $1,000/year
- Taxes and Licensing (TL) = $500/year
- Maintenance and Repairs (MR) = $3,000/year
- Fuel and Utilities (FU) = $6,000/year
- Storage (ST) = $1,200/year
- Transportation (TR) = $800/year
- Desired Profit Margin (PM) = 20%
- Expected Rental Utilization (N) = 800 hours/year
- Next, compute annual depreciation and total annual costs.
- Finally, apply profit margin and divide by expected annual utilization to find the rental rate.
ERR = \(\frac{\left(\frac{PP - SV}{UL} + FC + INS + TL + MR + FU + ST + TR\right)\left(1 + \frac{PM}{100}\right)}{N}\)
Annual Depreciation = (50,000 − 10,000) / 5 = 8,000 ($/year)
Total Annual Costs = 8,000 + 2,000 + 1,000 + 500 + 3,000 + 6,000 + 1,200 + 800 = 22,500 ($/year)
Annual Revenue Needed = 22,500 × (1 + 20/100) = 27,000 ($/year)
ERR = 27,000 / 800 = 33.75 ($/hr)
Example Problem #2:
For this problem, the variables required are provided below:
PP (purchase price) = $120,000
SV (salvage value) = $20,000
UL (useful life) = 8 years
FC (financing costs) = $6,000/year
INS (insurance) = $2,500/year
TL (taxes and licensing) = $1,500/year
MR (maintenance and repairs) = $8,000/year
FU (fuel and utilities) = $12,000/year
ST (storage) = $3,000/year
TR (transportation) = $2,000/year
PM (profit margin) = 15%
N (expected rental utilization) = 150 days/year
Test your knowledge using the equation and check your answer with the calculator.
ERR = \(\frac{\left(\frac{PP - SV}{UL} + FC + INS + TL + MR + FU + ST + TR\right)\left(1 + \frac{PM}{100}\right)}{N}\) = ?
