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

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

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

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

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

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

7. SPECIFIC OBJECTIVES Minimize ownership and operating cost Increase availability Increase utilization

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

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

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

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

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

13. UTILIZATION DATA  Load  Speed  Environment  Underfoot

14. UTILIZATION Utilization is working time duration not calendar duration.

15. UTILIZATION DATA Basis of costing  Hourly  Daily  Weekly  Miles  Fuel consumption

16. OWNING & OPERATING COST QUESTIONS 4 Rental rates for internal costing

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

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

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

20. OWNERSHIP COST Usage Cost

21. 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

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

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

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

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

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

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

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

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

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

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

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

33. OPERATING COST Usage Cost

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

35. 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

36. 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.

37. 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]

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

39. 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)

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

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

42. Uniform series capital recovery factor u 0.263797

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

44. 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]

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

46. Uniform series sinking fund factor F = $60,000

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

48. Ownership Cost Time Value Method

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

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

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

52. Investment Cost

53. Depreciation

54. Hourly Depreciation

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

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

57. 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

58. 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

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

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

61. 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

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

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

64. 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

65. 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

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

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

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

69. 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]:

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

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

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

73. 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

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

75. 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

76. 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

77. OPERATING COST OPERATOR WAGES