Arab Academy for Science, Technology & Maritime Transport

College of Engineering & Technology

Construction & Building Engineering

CB 524
Methods and Equipment for Construction 2
Equipment Economics

Spring, 2015
Instructor: Ahmed Elyamany
 EQUIPMENT
ECONOMICS
OBJECTIVE:
Provide the right equipment
at the right time and place,
so the work can be
accomplished at the lowest
cost.
2
 EQUIPMENT
ECONOMICS
How much does it cost to
operate the machine on a
project?

3
 WORK AT THE
LOWEST COST
Not the same as lowest initial
cost.

4
 Cost of Money
Interest Rate
Sources of capital funds:

Borrow

Earnings

Equity
5
 TOTAL EQUIPMENT
COST

$ Depreciation 25%
$ Operating 23%
$ Repair 37%
$ Overhead 15%
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 TOTAL 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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 UTILIZATION

Is working time duration

Is not calendar duration.

9
 UTILIZATION DATA
Basis of costing
 Hourly
 Daily
 Weekly
 Miles
 Fuel consumption
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 OWNERSHIP COST
 Depreciation (Purchase
expense)
 Insurance
 Taxes
 Salvage value
 Shop expenses
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 OWNERSHIP COST
Purchase price*
- Salvage
+ Overhead
= Ownership expense
* A fixed cost, occurs if machine
works 2,000 or 20,000 hrs
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OWNERSHIP COST

Usage
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 OWNERSHIP COST
Average Hours to Replacement

• Rollers 9,500
• Wheel loaders 12,300
• Crawler dozers 12,500
• Hydraulic excavators 12,500
• Graders 14,300
• Scrapers 16,100
• Off-highway trucks 18,300
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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

New $260,000

4 yr later $120,000

Ownership expense = $140,000

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 OWNERSHIP COST

New $260,000

8 yr later $0

Ownership expense = $260,000

18
 OWNERSHIP COST
 Include the cost of all attachments
and delivery charges in initial
machine cost (delivered price).
 Deduct tire cost for wheel-type
machines

19
 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
 Consumables - fuel, oil,
grease & filters (FOG)
 Repair
 Maintenance
 Tires or tracks
 High wear items - cutting
edges, teeth

22
 OPERATING COST
High wear items
Bucket teeth

Cutting edges

Ripper tips 23
 OPERATING COST
Question No. 4 Machine operating
cost includes which of the expenses
listed?

$ Repairs
$ Interest
$ Tires
$ Taxes
24
 OPERATING COST
Question No. 4 Machine operating
cost includes which of the expenses
listed?

$ Repairs
$ Interest
$ Tires
$ Taxes
25
OPERATING COST

Usage
26
 Cost of Equipment
• Construction equipment can be
purchased or rented.
– Purchased when used extensively
– Rented when used sparingly.
• When equipment is purchased, it is
necessary to determine:
– (a) ownership cost
– (b) operating cost
 Construction Equipment
Costs
 Ownership costs include:
 Initial cost,
 Financing (investment) costs,
 Depreciation costs
 Taxes and insurance costs
 The operating costs include:
 Maintenance and repair costs,
 Storage costs
 Fuel and lubrication costs
 Ownership cost-
Investment on money
• The money to purchase the equipment will be
borrowed from a lender, or it will be taken from
the reserve funds of the purchaser.
• So, either the lender will charge an interest for
the borrowed money, or the buyer will lose any
interest income on the money taken out of his
reserve funds.
• Therefore, the interest expense or the loss of
the interest income, is part of the ownership
cost.
 Ownership cost-
Investment on money

Capital Recovery Equation is as follows:

where
P = purchase price
A = equivalent annual value
I = annual interest rate
n = useful life, yrs
 Ownership cost-
Investment on money

Sinking Fund equation is as follows:

where
A = equivalent annual value
F = future salvage value
i = annual interest rate
n = useful life, yrs
Time Value of Money
Equations Summary
 Ownership cost-
Investment on money

• Interest rate for the borrowed money,

• Additional interest rate to cover the risk
• Additional interest rate for taxes,
insurance and storage.

• The sum of all the three interest rates is

called the Minimum Attractive Rate of
Return (MARR).
 Ownership cost-
Investment on money
Example
• The purchase price of equipment is $145,000.
• The estimated salvage value is $25,000 after the
end of its expected useful life of 6 years.
• Assume interest for
– Borrowing money as 9%
– Risk as 5%,
– Taxes, insurance and storage as 3%.
• Determine the annual ownership cost.
 Ownership cost-
Investment on money
Solution
• Minimum attractive rate of return = 9+5+3 = 17%
• Useful life n = 6 yrs
• Initial investment (P) = $145,000

• A = $40,397
• Salvage value at the end of useful life = $25,000
• A = $25,000 x 0.1086 = $2715
• Net annual ownership cost = $40,397‐‐$2,715 =
$37,684.
 Ownership Cost-
Depreciation of equipment
• The depreciation of equipment is normally
assumed to be linear over its useful life.
• In other words, annual depreciation is
calculated by dividing the purchase price by the
useful life of the equipment
• Annual Depreciation =(P – F)/n
 Operating Cost-
Cost of fuel
• Construction equipment require fuel for operating
• The fuel may be gasoline or diesel.
• The equipment is seldom used for 60 minutes per hour.
• Most machines normally operate for 45 minutes per hour.
• Moreover, the machine is not operated at its full capacity
all the time.
• It may work at full power during heavy load conditions.
• At normal temperature and pressure;
– Gasoline engine will consume approximately 0.06
gallons of fuel for each hp developed.
– Diesel engine will consume approximately 0.04
gallons of fuel for each hp developed.
 Operating Cost-
Cost of fuel
Example
• A shovel is used in a digging operation.
• Its rated horse‐‐power is 160.
• During an operating cycle of 20 seconds, the
engine is operated at full power while filling the
bucket in tough ground, requiring 5 seconds.
• During the balance of the cycle, the engine is
operated at 50 percent of its rated power and the
shovel is operated only for 45 minutes per hour.
• Calculate the diesel required per hour.
 Operating Cost-
Cost of fuel
Solution
• Engine factor:
• Filling the bucket: (5/20) x 100% = 0.250
• Rest of cycle: (15/20) x 50% = 0.375
• Engine factor = 0.625
• Time factor = 45/60 = 0.750
• Operating factor = 0.625 x 0.750 = 0.47
• Fuel required = 0.47 x 160 x 0.04 = 3.0 gal/hr
 Operating Cost-
Cost of lubricating oil

• The quantity of oil consumed can be estimated

by means of the following equation:
• Q = {(hp x 0.6 x 0.006)/7.4} + c/t
• where
– Q = quantity of oil required, gal/hr
– hp = rated horsepower of the engine
– c = capacity of crankcase, gal
– t = hrs between oil changes,
– 0.6 = operating factor
 Operating Cost-
Cost of lubricating oil
Example
• A shovel fitted with a 100‐‐hp motor is
used in a digging operation.
• The capacity of crankcase is 4 gal and oil
has to be changed every 100 hours of
operation.
• Assuming an operating factor of 0.6,
calculate the lubricating oil required for
the engine.
 Operating Cost-
Cost of lubricating oil
Solution
Substituting numbers in
Q = {(hp x 0.6 x 0.006)/7.4} + c/t

Q = {(100 x 0.6 x 0.006)/7.4} + 4/100

Q = 0.526 gal/hr
 Operating Cost-
Cost of maintenance
The annual cost of maintenance and repairs
is often expressed as:
a percentage of the purchase price
or
a percentage of the straight‐‐line
depreciation costs (P – F)/n
 Operating Cost-
Cost of maintenance
Example
Calculate the hourly rate of an equipment has :
 Purchase price (P) = LE460,000
 Salvage value (F) = LE40,000
 Useful life (N) = 10 years
 Working hours per year = 2000 Hours
 Annual maintenance costs = 10% of purchase
price
 Annual operating costs = LE47,000
 Interest rate (i) = 15%
 Operating Cost-
Cost of maintenance
Solution
 Annual Ownership cost =

  0.1 5(1.15)10    0.15 

460000 10
 − 40000 10

  (1.15) −1    (1.15) −1 

 Annual Ownership cost = LE89,685/year

 Operating Cost-
Cost of maintenance
Solution
 Maintenance and repair cost = 0.1 × 460,000
= LE46,000/year
 Operating costs = LE47,000/year
 Total annual costs = 89,685 + 46,000 + 47,000
= LE182,684/year
 Accordingly, the hourly cost = 182,684/ 2,000
= LE91.34/hr
 Ownership Cost
Example
Determine the probable cost per hour of
owning and operating a scraper given:
 Engine 350HP diesel
 Overall cost of money 10%
 Useful life 5 years
 Hours used per year 2000 hr
 Initial cost $470,000
 Cost of tires $30,000
 Estimated salvage value $60,000 47
 Ownership Cost
Example
Deduct tire cost from the delivered price for
large machines.
Tires are considered a wear item and are
treated as an operating cost.

48
 Ownership Cost
Example
Initial cost $470,000
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
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 Ownership Cost
Example
Uniform series capital recovery factor

 i (1 + i )  n

A = P n 
 (1 + i ) − 1 
A = uniform end-of-period payments or
receipts continuing for a duration of n
periods.
50
 Ownership Cost
Example
Uniform series capital recovery factor

 i (1 + i ) n

 n 
 (1 + i ) − 1 
 Overall cost of money 10% (i)
 Useful life 5 years (n)
51
 Ownership Cost
Example
Uniform series capital recovery factor

 0 .10 (1 + 0 .10 )  5

 5 
 (1 + 0 . 10 ) − 1 
 Overall cost of money 10%
 Useful life 5 years
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 Ownership Cost
Example
Uniform series capital recovery factor

 0 .161051 
 0 .610510 

= 0.263797
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 Ownership Cost
Example
Uniform series capital recovery factor

A = $440,000 × [0.263797]
A = $116,071 per year
P = a present amount of money.
54
 Ownership Cost
Example
Uniform series sinking fund factor
• Estimated salvage value $60,000
Need to calculate the uniform series
required to replace at end of period
amount of $60,000

55
 Ownership Cost
Example
Uniform series sinking fund factor

 i 
A = F n 
 (1 + i ) − 1 
F = a future single amount after
n periods of time.
56
 Ownership Cost
Example
Uniform series sinking fund factor

 0.10 
A = F 5 
 (1 + 0 . 10 ) − 1 
F = $60,000
57
 Ownership Cost
Example
Uniform series sinking fund factor

A = $60,000 × [0.163797]
A = $9,828 per year

58
 Ownership Cost
Example

$116,071- $9,828
=
2,000 hr / yr
$53.12 / hour
59
 Operating Cost
Example

Annual cost of repairs equals

70% of str. Line depreciation
Operating factor, 0.5
Cost of fuel $1.02 per gal

60
 Operating Cost
Example
Crankcase capacity, 14 gal
Time between oil changes, 200 hr
Cost of lube oil $2.50 per gal
Cost of other oils and grease
$0.45 per hour

61
 Operating Cost
Example

Repairs to tires 14% of tire

depreciation
Life of tires 4,000 hours

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 Operating Cost
Example
Repair
Hourly depreciation
= (440,000-60,000)/(5*2,000)
= $38.00

Repair = $38.00 X 70% =

$26.60 per hour
63
 Operating Cost
Example
Fuel
Operating factor, 0.5
Cost of fuel $1.02 per gal

0.04 X 350hp X 0.5 = 7 gal/hr

7 gal X $1.02/gal = $7.14/hr
64
 Operating Cost
Example
Oil & Grease

What the engine burns Oil changes

350hp × 0.5 × 0.006 14 gal

q= +
7.4 200 hr
q = 0.1418919 + 0.070 = 0.212 gal/hr
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 Operating Cost
Example
Oil & Grease
Cost of lube oil $2.50 per gal
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
66
 Operating Cost
Example
Tire Repair
Tire repairs 14% of tire depreciation
Life of tires 4,000 hours
$30,000
Tire Depreciation= = $7.50 /hr
4,000 hr
$7.50 X 14% = $1.05 per hour
67
 Operating Cost
Example
Tire Depreciation
How many tire replacements
Life of tires 4,000 hours

5 yr × 2,000 hr / yr
= 2.5 sets
4,000 hr
Therefore 3 sets
68
 Operating Cost
Example
Tire Depreciation
First set: (purchased at time 0)
Uniform series capital recovery factor
[Eq. 2.6]
$30,000 × (0.263797)
= $3.96/hr
2,000 hr
69
 Operating Cost
Example
Tire Depreciation
Second set: (purchased at time 2
years in future) must first calculate
value at time zero.

70
 Operating Cost
Example
Tire Depreciation
Second set: 2 years in future
If a future amount F is given, the
present amount P equals [Eq. 2.2]:

F
P= n
(1 + i )
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 Operating Cost
Example
Present Worth Compound Amount Factor

1
n
(1 + i )
Overall cost of money 10% (i)
n = 2 years
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 Operating Cost
Example
Present Worth Compound Amount Factor

1
2
= 0 . 826446
(1 + 0 . 10 )
Overall cost of money 10%
n = 2 years
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 Operating Cost
Example
Tire Depreciation
Second set: value at time zero.
P = $30,000 X (0.826446)
= $24,793
$24,793 × (0.263797)
= $3.27/hr
2,000 hr
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 Operating Cost
Example
Tire Depreciation
Third set: (purchased 4 yr in the
future) must first calculate value at
time zero.
P = $30,000 X (0.683013)
= $20,490

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 Operating Cost
Example
Tire Depreciation
Third set: purchased 4 years in the
future $20,490

$20,490 × (0.263797)
= $2.70/hr
2,000 hr

76
 Operating Cost
Example
Tire Depreciation
First set: $3.96/hr
Second set: $3.27/hr
Third set: $2.70/hr
Total Tire Dep. $9.93/hr
77
 Operating Cost
Example
Repair $26.60/hr
Fuel 7.14
Lube Oils 0.98
Tire repair 1.05
Tire dep. 9.93

Total Oper $45.70/hr

78
Operating Cost
OPERATOR WAGES

79
Thank You

80