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Construction equipment management chapter 4

Construction Equipment Management

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Construction equipment management chapter 4

  1. 1. University University Madawalabu Madawalabu Construction Equipment and Plant Management COTM 4202 Lecture by Lecture by: : Andualem Andualem Endris Endris ( (M.Sc M.Sc) ) andu0117@yahoo.com andu0117@yahoo.com School of Engineering, School of Engineering, Construction Technology & Management Construction Technology & Management D Department epartment
  2. 2. A construction company can acquire a construction plant and equipment through  Cash or outright purchase Renting Leasing A construction company can acquire a construction plant and equipment through  Cash or outright purchase Renting Leasing February 2, 2019 2 COTM 4202
  3. 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. 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. February 2, 2019 3 COTM 4202
  4. 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 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 February 2, 2019 4 COTM 4202
  5. 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. 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. February 2, 2019 5 COTM 4202
  6. 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 • 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 February 2, 2019 6 COTM 4202
  7. 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 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 February 2, 2019 7 COTM 4202
  8. 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 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 February 2, 2019 8 COTM 4202
  9. 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 • 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 February 2, 2019 9 COTM 4202
  10. 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 • 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 February 2, 2019 10 COTM 4202
  11. 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) 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) February 2, 2019 11 COTM 4202
  12. 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) 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) February 2, 2019 12 COTM 4202
  13. 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 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 February 2, 2019 13 COTM 4202
  14. 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. 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. February 2, 2019 COTM 4202 14
  15. 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) 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) February 2, 2019 15 COTM 4202
  16. 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) • 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) February 2, 2019 COTM 4202 16
  17. 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. 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. February 2, 2019 17 COTM 4202
  18. 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. 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. February 2, 2019 18 COTM 4202
  19. 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 • 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 February 2, 2019 COTM 4202 19
  20. 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 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 February 2, 2019 20 COTM 4202
  21. 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 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 February 2, 2019 21 COTM 4202
  22. 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. 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. February 2, 2019 22 COTM 4202
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  24. 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. 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. February 2, 2019 24 COTM 4202
  25. 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. • 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. February 2, 2019 COTM 4202 25
  26. 26. February 2, 2019 26 COTM 4202 Thank You Thank You

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