Chapter 4- Lecture
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The document discusses various methods for acquiring construction plant and equipment, including outright purchase, renting, and leasing. It also discusses factors to consider for equipment ownership such as depreciation methods, investment costs, and operating costs. Methods for determining optimal replacement timing are also covered, including minimum cost, maximum profit, and payback period analyses. The key costs involved in equipment ownership and use are depreciation, investment, insurance, taxes, storage, maintenance and repair, tires, consumables, mobilization, labor, and special items.
![• Investment cost is computed as the product of interest
rate multiplied by the value of the equipment, which is
then converted into cost per hour of operation.
• Assuming no salvage value, the average value of
equipment may be determined from the following
equation:
P= C(n+1)/2
• If it has salvage value:
P= [C(n+1) + S(n-1)]/2n
P = Average value of the equipment
C = Initial cost
S = Salvage value
n = The useful life (years)
July 31, 2021 COTM 4202 16](https://image.slidesharecdn.com/chapter4-210731153452/85/Chapter-4-Lecture-16-320.jpg)
Chapter 4- Lecture
- 1. University Madawalabu Lecture by: Andualem Endris (M.Sc) andu0117@yahoo.com School of Engineering, Construction Technology & Management Department Construction Equipment and Plant Management COTM 4202
- 2. A construction company can acquire a construction plant and equipment through Cash or outright purchase Renting Leasing July 31, 2021 2 COTM 4202
- 3. Buying or financing equipment is most sensible if the equipment is essential to your core fleet and expected to provide reliable service for a long time. If you decide it's worth the large outlay of funds to buy or finance equipment, you'll find owning equipment can provide long-term benefits. July 31, 2021 3 COTM 4202
- 4. Renting entails a short-term agreement or contract to use capital equipment weekly or monthly, with the rental rate decreasing as the term lengthens. Following are some other popular reasons for renting equipment: • To fill in for peak periods, special projects, or broken machinery • To try out equipment before buying or leasing it • To lessen the risk of purchasing costly equipment that won’t be needed later July 31, 2021 4 COTM 4202
- 5. Leasing can be an attractive option if you use the equipment frequently but don’t have the resources to purchase equipment outright or make an adequate down payment. However, leasing carries higher interest rates and contractors usually are responsible for the insurance and personal property taxes on the equipment being leased. July 31, 2021 5 COTM 4202
- 6. • The Plant, equipment and tools used in construction operations are priced in the following three categories 1. Small tools and consumables 2. Equipment usually shared by a number of work activities 3. Equipment used for specific tasks • Total equipment cost comprises two separate components Ownership cost Operating cost July 31, 2021 6 COTM 4202
- 7. Ownership costs are fixed costs. Almost all of these costs are annual in nature and include: Initial Cost Depreciation Investment (Interest) Cost Insurance, Tax and Storage Cost July 31, 2021 7 COTM 4202
- 8. On an average, initial cost makes up about 25% of the total cost invested during the equipment’s useful life. This cost is incurred for getting equipment into contractor’s yard, or construction site, and having the equipment ready for operation. Many kinds of ownership and operating costs are calculated using initial cost as a basis, and normally this cost can be calculated accurately. Initial cost consists of the following items: • Price at Factory + extra equipment + sales tax • Cost of shipping • Cost of assembly and erection July 31, 2021 8 COTM 4202
- 9. • The decline in market value of a piece of equipment due to age, wear, deterioration and obsolescence. • In the appraisal of depreciation, some factors are explicit while other factors have to be estimated. • Generally the asset costs are known which include: • Initial cost: The amount needed to acquire the equipment • Useful life: The number of years it is expected to be of utility value • Salvage value: The expected amount the asset will be sold at the end of its useful life July 31, 2021 9 COTM 4202
- 10. • How ever, there is always some uncertainty about the exact length of the useful life of the asset and about the precise amount of salvage value, which will be realized when the asset is disposed. • The depreciation methods are: • Straight line method • Sum of years digit method • Declining balance method July 31, 2021 10 COTM 4202
- 11. It is the simplest to understand as it makes the basis assumption that the equipment will lose the same amount of value in every year of its useful life until it reaches its salvage value. The depreciation in a given year can be expressed by the following equation Dn = (C – S) / N Where Dn = Depreciation in year n C = The initial cost S = The salvage value N = The useful life (years) July 31, 2021 11 COTM 4202
- 12. It tries to model depreciation that actual market value of a piece of equipment after 1year is less than the amount predicted by SL method. Thus more annual depreciation in the early years of a machine’s life and less in its later years. The depreciation in a given year can be expressed by the following equation Dn = (year n digit) * (C – S ) / ∑N Where Dn = Depreciation in year n year n digit = The reverse order C = The initial cost S = The salvage value N = The useful life (years) July 31, 2021 12 COTM 4202
- 13. The depreciation for a given year is calculated on the basis of the undepreciated balance (instantaneous book value), rather than the original cost. Further the method does not take into account any salvage value of the asset. The factor can be determined using simple interest formula and also special tables developed for the purpose. Dn = (M/N) * BVn-1 BVn = BVn-1 - Dn Where Dn = Depreciation in year n M = constant (Generally 2 for double declining) N = The useful life (years) BVn-1 = Opening book value at year n July 31, 2021 13 COTM 4202
- 14. Compare the depreciation in each year of the equipment’s useful life for each of the above depreciation methods for the following wheeled front-end bucket loader: • Initial cost:1,480,000 Birr includes delivery and other costs • Useful life: 7 years • Salvage value: 180,000 Birr. July 31, 2021 COTM 4202 14
- 15. Investment (or interest) cost represents the annual cost (converted into an hourly cost) of capital invested in a machine. If borrowed funds are utilized for purchasing a piece of equipment, the investment cost is simply the interest charged on these funds. If it is purchased with company assets, an interest rate that is equal to the rate of return on company investment should be charged. P= C(n+1)/2 P= Average value of the equipment C= initial cost n=the useful life (years) July 31, 2021 15 COTM 4202
- 16. • Investment cost is computed as the product of interest rate multiplied by the value of the equipment, which is then converted into cost per hour of operation. • Assuming no salvage value, the average value of equipment may be determined from the following equation: P= C(n+1)/2 • If it has salvage value: P= [C(n+1) + S(n-1)]/2n P = Average value of the equipment C = Initial cost S = Salvage value n = The useful life (years) July 31, 2021 COTM 4202 16
- 17. Insurance cost represents the cost incurred due to fire, theft, accident and liability insurance for the equipment. Tax cost represents the cost of property tax and licenses for the equipment. Storage cost includes the cost of rent and maintenance for equipment storage yards, the wages of guards and employees involved in moving equipment in and out of storage, and associated direct overhead. July 31, 2021 17 COTM 4202
- 18. The total equipment ownership cost is calculated as the sum of depreciation, investment cost, insurance cost, tax and storage cost. This should be expressed as an hourly cost and used for estimating and for charging equipment cost to projects, it does not include job overhead or profit. Therefore if the equipment is to be rented to others, profit should include to obtain an hourly rental rate. July 31, 2021 18 COTM 4202
- 19. • Calculate the hourly ownership cost for the second year of operation of a 465 hp twin-engine scraper. This equipment will be operated 8 h/day and 250 days/year in average conditions. Use the sum-of-years’-digit method of depreciation as the following information: • Initial cost: 1,860,000 Birr • Tire cost: 140,000 • Estimated life: 5 years • Salvage value: 120,000 • Interest on the investment: 8% • Insurance: 1.5% • Taxes: 3% • Storage: 0.5% • Fuel price: 72.00Birr/gal • Operator’s wages: 32 Birr /h July 31, 2021 COTM 4202 19
- 20. Ownership costs are also called “variable” cost. Because they depend on several factors such as the number of operating hours, the types of equipment used, and the location and working condition of the operation. Maintenance & Repair cost Tire cost Consumable cost Mobilization & Demobilization cost Equipment Operator cost Special Items cost July 31, 2021 20 COTM 4202
- 21. Once a piece of equipment is purchased and used, it eventually begins to wear out and suffers mechanical problems. At some point, it reaches the end of its useful life and must be replaced. The Equipment replacement decision involves determining when it is no longer economically feasible to repair. Equipment Life Replacement alternatives July 31, 2021 21 COTM 4202
- 22. Construction equipment life can be defined in three ways. Physical life: Age at which the machine worn out and can no longer reliably produce. Profit life: The life over which the equipment can earn a profit. Economic life: Time period that maximizes the profit over the equipment life. July 31, 2021 22 COTM 4202
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- 24. The owners have to take replacement decision in correct time to avoid losses. As there are many factors involved, adopting the most appropriate method is also important. In determining the optimum replacement timing some analysis minimum cost, maximum profit and payback period are to be considered. July 31, 2021 24 COTM 4202
- 25. • What is the yearly depreciation for a truck with an initial cost of 1,500,000 Birr, an assumed life of five years, and an expected resale value of 480,000 Birr? Solve using: • Straight line method • Declining balance method • SoYD method. July 31, 2021 COTM 4202 25
- 26. July 31, 2021 26 COTM 4202 Thank You