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Copyright © The McGraw-Hill Companies, Inc. Permission required for reproduction or display. Chapter 2 Fundamental Concepts of Equipment Economics

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EQUIPMENT ECONOMICS OBJECTIVE: Provide the right equipment at the right time and place, so the work can be accomplished at the lowest cost.

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EQUIPMENT ECONOMICS How much does it cost to operate the machine on a project?

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WORK AT THE LOWEST COST Not the same as lowest initial cost.

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Cost of Money Interest Rate Sources of capital funds: u Borrow u Earnings u Equity

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WORK AT THE LOWEST COST Machine utilization Utilization drives purchase or rent/lease decision.

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SPECIFIC OBJECTIVES Minimize ownership and operating cost Increase availability Increase utilization

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LIFE CYCLE COST Predicting costs of Ownership and Usage. Using that information in decision making.

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TOTAL EQUIPMENT COST $ Depreciation 25% $ Operating 23% $ Repair 37% $ Overhead 15%

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EQUIPMENT COST Question No. 1 What is the largest single equipment cost?

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TOTAL EQUIPMENT COST $ Depreciation 25% $ Operating 23% $ Repair 37% $ Overhead 15%

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INFORMATION SYSTEM Machine identification 4 Utilization data 4 Purchase cost 4 Repair cost 4 Operating charges FOG (fuel, oil, grease )

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UTILIZATION DATA Load Speed Environment Underfoot

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UTILIZATION Utilization is working time duration not calendar duration.

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UTILIZATION DATA Basis of costing Hourly Daily Weekly Miles Fuel consumption

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OWNING & OPERATING COST QUESTIONS 4 Rental rates for internal costing

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OWNING & OPERATING COST QUESTIONS 4 Maintenance and PM decisions 4 Disposal/Replacement guidance

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OWNERSHIP COST Depreciation (Purchase expense) 4 Insurance 4 Taxes 4 Salvage value 4 Shop expenses

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OWNERSHIP COST Purchase price* - Salvage + Overhead = Ownership expense * A fixed cost, occurs if the machine works 1,000 or 17,000 hrs

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OWNERSHIP COST Usage Cost

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Average Hours to Replacement Rollers 9,500 Wheel loaders12,300 Crawler dozers 12,500 Hydraulic excavators12,500 Graders14,300 Scrapers16,100 Off-highway trucks18,300

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OWNERSHIP COST Question No. 2 Regardless of how much a machine is used, the owner must pay owning cost. True False

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OWNERSHIP COST Question No. 2 Regardless of how much a machine is used, the owner must pay owning cost. True False

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OWNERSHIP COST Ownership expense = $140,000 New$260,000 4 yr later$120,000

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OWNERSHIP COST Ownership expense = $260,000 New$260,000 8 yr later $0

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OWNERSHIP COST Include the cost of all attachments and delivery charges in initial machine cost (delivered price). Deduct tire cost for wheel- type machines

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OWNERSHIP COST Question No. 3 Machine owning cost includes which of the expenses listed? $ Repairs $ Insurance $ Fuel $ Taxes

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OWNERSHIP COST Question No. 3 Machine owning cost includes which of the expenses listed? $ Repairs $ Insurance $ Fuel $ Taxes

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OPERATING COST u Consumables - fuel, oil, grease & filters (FOG) u Repair u Maintenance u Tires or tracks u High wear items - cutting edges, teeth

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OPERATING COST High wear items u Bucket teeth u Cutting edges u Truck body liners u Ripper tips u Ripper shank protectors

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OPERATING COST Question No. 4 Machine operating cost includes which of the expenses listed? $ Repairs $ Interest $ Tires $ Taxes

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OPERATING COST Question No. 4 Machine operating cost includes which of the expenses listed? $ Repairs $ Interest $ Tires $ Taxes

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OPERATING COST Usage Cost

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Ownership Cost Example Determine the probable cost per hour of owning and operating a scraper given the following conditions. u Engine 350HP diesel

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Ownership Cost u Overall cost of money 10% u Useful life 5 years u Hours used per year 2000 u Initial cost $470,000 u Cost of tires $30,000 u Estimated salvage value $60,000

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Ownership Cost Time Value Method Deduct tire cost from the delivered price for large machines. Tires are considered a wear item and are treated as an operating cost.

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Ownership Cost Time Value Method u Initial cost $470,000 u Cost of tires $30,000 $440,000 Need to calculate the uniform series required to replace a present value of $440,000 Uniform series capital recovery factor [Eq. 2.6]

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A = uniform end-of-period payments or receipts continuing for a duration of n periods.

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Uniform series capital recovery factor [Eq. 2.6] P = a present single amount of money. i = the rate of interest per period of time (usually 1 year)

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Uniform series capital recovery factor [Eq. 2.6] Overall cost of money 10% ( i ) Useful life 5 years ( n )

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Uniform series capital recovery factor u Overall cost of money 10% u Useful life 5 years

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Uniform series capital recovery factor u 0.263797

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Ownership Cost Time Value Method P = a present amount of money. A = $440,000 [0.263797] A = $116,071 per year

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Ownership Cost Time Value Method Estimated salvage value $60,000 Need to calculate the uniform series required to replace a end of period amount of $60,000 Uniform series sinking fund factor [Eq. 2.4]

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Uniform series sinking fund factor F = a future single amount after n periods of time.

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Uniform series sinking fund factor F = $60,000

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Uniform series sinking fund factor A = $60,000 [0.163797] A = $9,828 per year

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Ownership Cost Time Value Method

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Ownership Cost Average Annual Investment Method P = purchase price S = salvage value n = life in years

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Ownership Cost Average Annual Investment Method P = $440,000 S = $60,000 n = 5 years

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Ownership Cost Average Annual Investment Method AAI = $288,000/yr

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Investment Cost

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Depreciation

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Hourly Depreciation

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Ownership Cost Average Annual Investment Method $14.40 + $38.00 = $52.40/hr

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Ownership Cost Time Value Method $53.12/hr Average Annual Investment Method $52.40/hr Difference between the methods $0.72

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Operating Cost Example u Annual cost of repairs equals 70% of str. Line depreciation u Operating factor, 0.5 u Cost of fuel $1.02 per gal

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Operating Cost u Crankcase capacity, 14 gal u Time between oil changes, 200 hr u Cost of lube oil $2.50 per gal u Cost of other oils and grease $0.45 per hour

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Operating Cost u Repairs to tires 14% of tire depreciation u Life of tires 4,000 hours

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OPERATING COST Repair Hourly depreciation $38.00 $38.00 X 70% = $26.60 per hour

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OPERATING COST Fuel u Operating factor, 0.5 u Cost of fuel $1.02 per gal See discussion top of page 36. 0.04 X 350hp X 0.5 = 7 gal/hr 7 gal X $1.02/gal = $7.14/hr

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OPERATING COST Fuel Manufacturer’s consumption data can be used to estimate fuel.

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OPERATING COST Oil & Grease What the engine burns Oil changes q = 0.1418919 + 0.070 = 0.212 gal/hr Equation 2.12, page 37

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OPERATING COST Oil & Grease u Cost of lube oil $2.50 per gal u Cost other oils and grease $0.45/hr 0.212 gal/hr X $2.50/gal = $0.53/hr Other oils and grease = $0.45/hr Total cost O&G = $0.98/hr

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OPERATING COST Tire Repair u Tire repairs 14% of tire depreciation u Life of tires 4,000 hours $7.50 X 14% = $1.05 per hour

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OPERATING COST Tire Depreciation How many tire replacements u Life of tires 4,000 hours Therefore 3 sets

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OPERATING COST Tire Depreciation First set: (purchased at time 0) Uniform series capital recovery factor [Eq. 2.6]

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OPERATING COST Tire Depreciation Second set: (purchased at time 2 years in future) must first calculate value at time zero.

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OPERATING COST Tire Depreciation Second set: 2 years in future If a future amount F is given, the present amount P equals [Eq. 2.2]:

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Present Worth Compound Amount Factor Overall cost of money 10% ( i ) u n = 2 years

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Present Worth Compound Amount Factor u Overall cost of money 10% u n = 2 years

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OPERATING COST Tire Depreciation Second set: value at time zero. P = $30,000 X (0.826446) = $24,793

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OPERATING COST Tire Depreciation Third set: (purchased at time 4 yr) must first calculate value at time zero. P = $30,000 X (0.683013) = $20,490

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OPERATING COST Tire Depreciation Third set: purchased 4 years in the future $20,490

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OPERATING COST Tire Depreciation First set: $3.96/hr Second set: $3.27/hr Third set: $2.70/hr Total Tire Dep. $9.93/hr

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Operating Cost u Repair$26.60/hr u Fuel 7.14 u Lube Oils 0.98 u Tire repair 1.05 u Tire dep. 9.93 u Total Oper $45.70/hr

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OPERATING COST OPERATOR WAGES

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