Adigrat university

Collage of Engineering and technology

Department of Civil Eng.

CONSTRUCTION EQUIPMENT
CHAPTER-2

Equipment Cost Estimation

Michael K.
 Equipment Cost Estimation
Equipment costs comprise two separate components:
Ownership costs and
Operating costs

1. Ownership cost
Ownership costs are fixed costs. Almost all of these costs are annual in nature and include:
Initial capital cost
Depreciation
Investment (or interest) cost
Insurance cost
Taxes
Storage cost
Total equipment ownership cost is calculated as the sum of depreciation,
investment cost, insurance cost, tax, and storage cost
Total owning cost should be expressed as an hourly cost
 1. Initial capital cost

The amount paid by the owner (a liquid asset) for the equipment (a fixed
asset) is considered as an exchange mechanism to own equipments.
Price at factory

sales tax(custom)

Cost of shipping

Cost of assembly and erection

On an average initial cost makes up about 25% of the total cost invested during the
equipments useful life.
 2. Depreciation
Depreciation represents the decline in market value of a piece of equipment .

The change in the assets value from year to year due to;

Age,

Wear,

Deterioration, and

Obsolescence.

Depreciation can result from:

Physical deterioration occurring from wear and tear of the machine
Economic decline or obsolescence occurring over the passage of time
 In the appraisal of depreciation, some factors have to be estimated.
Cont.
Initial cost: The amount needed to acquire the equipment
Useful life: The number of years it is expected to be of utility value

Physical life: the age at which a machine will be worn out to a point that it cant reliably
produce.
Profit life: is the life over which the machine can earn a profit.
Economic life: The time period over which the equipments profits are maximized
 Cont.
Salvage value: The expected amount the asset that will be sold at the end of its
useful life
ERA suggests 10% of initial cost as salvage value.
Methods of assessment of depreciation
In calculating depreciation, the initial cost of an item of equipment should be the
full delivered price, including transportation, taxes, initial assembly and
servicing.
For rubber-tired equipment, the value of tires should be subtracted from the
amount to be depreciated because tire cost will be computed separately as an
element of operating cost.
1. Straight-line method,
2. Accelerated Depreciations;
1. Double-declining balance
2. Sum-of-years-digits method
1. Straight-Line Depreciation
The straight-line method of depreciation produces a uniform depreciation for
each year of equipment life.
()
=

= IC SV-TC
N
Where: N = equipment life (years)
n = year of life (1,2,3,4)

Example Problem:

Using straight-line method of depreciation, find the annual depreciation and book value at the
end of each year for a track loader having an initial cost of 900,000 birr, a salvage value of
90,000 birr, and an expected life of 5 years.

Solution
, ,
,,.. = = ,

Depreciation Schedule:

Book Value
Depreciation
Year (End of Period)
Birr
Birr
0 0 900,000
1 162,000 738,000
2 162,000 576,000
3 162,000 414,000
4 162,000 252,000
5 162,000 90,000
2. Accelerated depreciations
In these methods, large amounts of depreciations are considered
during the early years of the equipment life and less in its later years

Two methods can be considered for accelerated depreciations approaches.

These are

1. Sum of Years Digit Methods

2. Double-Declining Balance
 Sum-of-the-Years-Digits Method
The sum-of-the-years-digits method of depreciation produces a non-
uniform depreciation which is the highest in the first year of life and
gradually decreases thereafter.
The depreciation for a particular year is calculated by multiplying the
amount to be depreciated by a depreciation factor.
The denominator of the depreciation factor is the sum of the years digits
for the depreciation period (or 1 + 2 + 3 + 4 + 5 = 15 for a 5-year life).

=


Example Problem:
Using Sum-of-the-Years-Digits Method of depreciation, find the annual depreciation
and book value at the end of each year for a track loader having an initial cost of
900,000 birr, a salvage value of 90,000 birr, and an expected life of 5 years.
Solution:
5
D1 = x 900,000 90,000 = 270,000 birr
15

4
D2 = x 900,000 90,000 = 216,000 birr
15

3
D3 = x 900,000 90,000 = 162,000 birr
15

2
D4 = x 900,000 90,000 = 108,000 birr
15

1
D5 = x 900,000 90,000 = 54,000 birr
15
Depreciation Schedule:

Book Value
Depreciation
Year (End of Period)
Birr
Birr
0 0 900,000
1 270,000 630,000
2 216,000 414,000
3 162,000 252,000
4 108,000 144,000
5 54,000 90,000
Double-Declining-Balance Method
The double-declining-balance method of depreciation, like the sum-of-the-years-
digit method, produces its maximum depreciation in the first year of life.
However, in using the double-declining-balance method, the depreciation for a
particular year is found by multiplying a depreciation factor by the equipments
book value at the beginning of the year
The annual depreciation factor is found by dividing 2 (or 200%) by the
equipment life in years. Thus for a 5-year life, the annual depreciation factor is
40 (or 40%).
Unlike the other two methods, the double-declining-balance method does not
automatically reduce the equipments book value to its salvage value at the
end of the depreciation period.
The book value of the equipment is not permitted to go below the salvage
value.
 2
=
Example Problem:

Using double-declining-balance method of depreciation, find the annual depreciation and book value
at the end of each year for a track loader having an initial cost of 900,000 birr, a salvage value of
90,000 birr, and an expected life of 5 years.

Solution:
.
= = 0.40

D1 = 0.40 x 900,000 = 360,000

D2 = 0.40 x 540,000 = 216,000

D3 = 0.40 x 324,000 = 129,600

D4 = 0.40 x 194,400 = 77,760

D5 = 0.40 x 116,640 = , ,
Depreciation Schedule:

Book Value
Depreciation
Year (End of Period)
Birr
Birr

0 0 900,000
1 360,000 540,000
2 216,000 324,000
3 129,600 194,400
4 77,760 116,640
5 26,640* 90,000

*Because a depreciation of 46,656 birr in the fifth year

would reduce the book value to less than 90,000 birr,
only 26,640 birr may be taken as depreciation.
Insurance, Tax, Interest & Storage Costs
Insurance costs often ranges from 1 3% of Average Annual Value (AAV) of
equipments which can either be an actual premium paid to insurance companies or a
self-insurance fund retained by the equipment owner.

Tax costs refer to those equipment ownership taxes charged by customs offices which
are commonly assessed between 2 4.5% of AAV depending on location and property
taxes.

Interest costs are related to either interest payments if the equipments are purchased

with loan or loss of interest on the money invested if purchased in cash.6% of initial
cost of the equipment per year CBE.
Interest cost/hr = IC[(1+r) n-1)] Year of interest(n) =Total service life in hours
Economic life (hrs.) 2000 hr.
 Cont.

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.

Average Annual Value of a machine(AAV)

AAV = [ IC (n + 1) ]+ [ SV (n 1) ]
2n

Where
IC = Initial cost less cost of tires
SV = The estimated salvage value
n = Expected service life in years
 Cont.
Example
Consider a unit of equipment costing 50,000birr with an estimating
salvage value of 15,000 birr after 5 years the average annual value is?

AAV = [ IC (n + 1) ]+ [ SV (n 1) ]
2n
=50,000(5+1) + 15,000(5-1)
2x5
= 36,000 birr/yr
 Insurance cost Cont.
Average Annual Value of a machine = IC(1+n)+ SV (n -1) x rate %
Tax costs 2n

Storage cost

2. Operating Costs
Are the costs associated with the operation of a piece of equipment.

They are incurred only when the equipment is actually used.

The operating costs of the equipment are also called variable costs because
they depend on several factors, such as;
The number of operating hours,

The types of equipment used,

The location and

 Major elements of operating cost:
Fuel cost
Service cost
Repair cost
Tire cost
Cost of special items
Operators wages
Fuel cost
The hourly cost of fuel is simply fuel consumption per hour multiplied by the cost per
unit of fuel (gallon or liter).
But fuel consumption vary depending 0n make, model, HP, working condition,
maintenance condition etc.
The table provides approximate fuel consumption factors in gallons per hour per
horsepower for major type of equipment under light, average, and severe load conditions.
Fuel Consumption factor (gal/h/hp)
 Cont.
F cost = F cons x F price
Where;
F cons = Hourly fuel consumption, in liters,
F cost = Hourly fuel cost
F price = Price of fuel per liter (Birr).

Service cost
Service cost represents the cost of oil, hydraulic fluids, grease, filters,
replacement of high wear items as well as the labor required to perform routine
maintenance service.

Service cost = x % fuel cost (depending on the type of the equipment)

Service Cost Assumptions
 Cont.
Oil Consumption
what the engine burns

q = hp *f * 0.0027 Kg per hp-hr + C oil change

0.89 Kg/lit t
q = Quantity consume, lph
hp = rated horse power of engine
C = capacity of crankcase, lit
f = operating factor
t = no.of hours between changes
Common practice to change oil every 100 to 200 hrs. but for extreme dirty
condition every 50 hrs.
 REPAIR COST
Repair cost represents the cost of all equipment repairs & maintenance except for Tire
repair and replacement, routine service, and the replacement of high-wear items, such as
ripper teeth.
It should be noted that repair cost usually constitutes the largest item of operating
expense for construction equipment.
Repair cosr/hr= X % (DC/hr)
Repair cost (Rc) = x % Depreciation cost (Dc) (depending on the type of equipment at an average
condition (see the table below).
 Lifetime repair cost
Lifetime repair cost is usually estimated as a percentage of the equipments
initial cost less tires (Table 3).
It is then necessary to convert lifetime repair cost to an hourly repair cost
 Tire Cost
Tire cost represents the cost of tire repair and replacement.
Tire repair will add about 15% to tire replacement cost.

($)
T = 1.15
(h)
Special Items
The cost of replacing high-wear items such as dozer, grader, and scraper blade cutting edges
and end bits, as well as ripper tips, shank protectors, should be calculated as a separate item
of operating expense.
As usual, unit cost is divided by expected life to yield cost per hour.
Operator
The final item making up equipment operating cost is the operators wage.
Overhead cost
Varies from organization to organization based on such factors as organization structure,
company policies on payments (salary, per dimes, etc) productivity, etc.
ERA manual gives 15% of operating and owning costs as overhead cost
Profits
In the commercial context, it is imperative to provide for profit as rooms for capacity
building.
ERA manual suggests 10% of Owning, operating and overhead costs.
 Cont.
Total rental cost
Owc/hr + Opc/hr + Ohc/hr + Pft/hr
Taking ERAs suggestion
Rental cost/hr = 1.265 (Owc/hr + Opc/hr)
Total Owning and Operating Costs
After owning cost and operating cost have been calculated, these are
totaled to yield total owning and operating cost per hour of operation
Hence overhead and profit must be added to obtain an hourly rental
rate if the equipment is to be rented to others.
Example Problem:

Calculate the expected hourly owning and operating cost for the second year of operation
of the twin-engine scraper described below.

Cost delivered = $152,000

Tire cost = $12,000
Estimated life = 5 years
Salvage value = $16,000
Depreciation method = sum-of-the-years-digit
Investment (interest) rate = 10%
Tax, insurance, and storage rate = 8%
Operating conditions = average
Rated power = 465 hp
Fuel price = $1.30/gal
Operators wages = $32.00/h
Solution:

Owning Cost

Depreciation cost:

4
2 = 152,000 16,000 12,000 = $,
15

,
Depreciation = = $16.53/hr

Investment, tax, insurance, and storage cost:

Cost rate = investment + tax, insurance, and storage = 10 + 8 = 18%

AAV = [ IC (n + 1) ]+ [ SV (n 1) ] = 152000(2+1)+16000(2-1)
2n 2x2
= 118000 birr
Investment, tax, insurance, and storage cost = 118000 x 0.18 = $10.62 /hr
2000 hr
Total Owning Cost = 16.53 + 10.62 = $27.15/h

Operating cost

Fuel cost:

Estimated consumption =Fuel consumption factor x Rated power

= 0.035 x 465 = 16.3 gal/hr (table 1)

Fuel cost = 16.3 x 1.30 = $21.19/h

Service cost:

Service cost = Service cost factor (%) x Fuel cost

= 0.33 x 21.19 = $7.06/h (table 2)
Repair cost:
Lifetime repair cost = Life time repair cost factor x (IC TC)
= 0.90 x (152,000 12,000) = $126,000 (table 3)

2 126,000
Repair cost = x = $ . /
15 2000
Tire cost
Estimated tire life = 3000 h (table 4)
12,000
= 1.15 x = $. /
3,000
Special item cost: None

Operator wages = $32.00/h

Total operating cost = 21.19 + 7.06 + 8.40 + 4.60 + 32.00 = $73.25/h

Total O & O Cost
Owning and operating cost = 27.15 + 73.25 = $100.40/h
Thank You!!!!!!!!!!!!!!!!!!!!!!!!
A & Qs