Lecture No.2 Cost of Owning and Operating Equipment

University of Babylon Subject: Methods of Construction and Estimation
College of Engineering Lecture No.: 2

Department of Civil Engineering Lesson topic: Cost of owning and operating
Class: IV Year Civil Eng., 2020-2021 construction equipment
Lecturers: Dr. Ali Hassoon & Dr. Hassanean Salam
The cost of owning and operating construction equipment
Factors affecting the cost of owning and operating equipment:

1- The time value of money.
2- Economical life of the equipment (useful life).
3- Purchase price of the equipment.
4- Annual operating hours.
5- Number of operating years.
6- Possibility of maintenance of equipment.
The time value of money
a- Simple interest method
Simple interest = P × R × n
b- Complex interest
𝑇 = 𝑃(1 + 𝑅 )𝑛
Where
T: future amount of money
P: present amount of money
R: interest rate
n: No. of years
Example 2.1:
Equipment was bought by 75 million I.D. Its economic life was 5
years. Calculate the cost of owning this equipment on the base of
5% interest yearly?
Solution
a- Simple interest method
Simple interest= 75 × 0.05 × 5 = 18.75 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝐼. 𝐷.
Cost= 75+18.75= 93.75 million I. D.
b- Complex interest method
𝐶𝑜𝑠𝑡 = 75(1 + 0.05)5 = 95.72 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝐼. 𝐷.
-1-
Calculation of the cost of owning and operating the equipment

First: constant annual cost (Fixed Cost)
a- Depreciation.
b- Maintenance and repair.
c- Investment.
d- Obsolescence.
𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑠𝑡
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = = 𝑐𝑜𝑠𝑡/ℎ𝑟
𝑁𝑜. 𝑜𝑓 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠
Second: operating cost
1- Fuel cost.
2- Oil cost.
3- Operators cost.
4- Administration cost.
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 𝑐𝑜𝑠𝑡 /ℎ𝑟
𝑇𝑜𝑡𝑎𝑙 𝑜𝑤𝑛𝑖𝑛𝑔 𝑎𝑛𝑑
[ ] = 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡
-2-
Depreciation
Depreciation is the loss in value of equipment resulting from the use or age.
Method of calculating depreciation

a- Straight-line method (S.L.M)
Value
Book
P
Value
P-S
Salvage S
Value
Age (year)
0 1 2 3 4 5 6
Book value= the price of purchase of the equipment which fixed

in the company books
𝑃−𝑆
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝑛
Where
P: book value
S: salvage value
n: age
b- Declining balance method (D.B.M.)
1
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = ×2
𝑛
n: age
B.V
Age (year)
0 1 2 3 4 5 6
-3-
Example 2.2:
Equipment has been bought with 60 million I.D. Its economic life is 5
years. Calculate its book value at the end of each year by declining
balance method.
Solution:
1
𝑟𝑎𝑡𝑖𝑜 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛(𝑎𝑛𝑛𝑢𝑎𝑙) = 2 ∗ = 0.4 = 40%
5
End of
% depreciation Value of Dep. ×106 I.D. Book value ×106 I.D.
year
0 --- ----- 60
1 40 60*0.4=24 36
2 40 36*0.4=14.4 21.6
3 40 8.64 12.96
4 40 5.184 7.776
5 40 3.1104 4.6656
c- Sum of the years digits method S.Y.D.

𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑑𝑖𝑔𝑖𝑡𝑠 = 1 + 2 + 3 + 4 + 5 + ⋯ + 𝑛
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑑𝑢𝑟𝑖𝑛𝑔 𝑓𝑖𝑟𝑠𝑡 𝑦𝑒𝑎𝑟
𝑛
=
𝑠𝑢𝑚 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑆. 𝑌.
Example 2.3:
Scraper of purchase price =125 million I.D. its economic life is 5 years.
Find the book value of the scraper at the end of each year by S.Y.D. if the
salvage value 12.5 million I.D.
Solution:
𝑆. 𝑌. 𝐷. = 1 + 2 + 3 + 4 + 5 = 15
𝑛 5
𝑟𝑎𝑡𝑖𝑜 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑑𝑢𝑟𝑖𝑛𝑔 𝑓𝑖𝑟𝑠𝑡 𝑦𝑒𝑎𝑟 = =
𝑆. 𝑌. 𝐷. 15
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 125 − 12.5 = 112.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝐼. 𝐷.
-4-
Total Dep. Dep. During year Book value

End of year Ratio of Dep.
106I.D 106I.D 106I.D
0 0 0 0 125
1 5/15 112.5 5/15*112.5=37.5 87.5
2 4/15 112.5 30.0 57.5
3 3/15 112.5 22.5 35.0
4 2/15 112.5 15.0 20
5 1/15 112.5 7.5 12.5
-5-
Cost of maintenance and repair
80-90% of the depreciation cost.
Investment cost
Consists of:
a- Interest.
b- Insurance.
c- Taxes and storage cost.
Investment rate between 10-15% of the annual value of equipment (𝑃̅)
𝑃(𝑛 + 1) + 𝑆(𝑛 − 1)
𝑃̅ =
2𝑛
Where
𝑃̅: Average value of equipment
𝑃: Book value of equipment
𝑆: Salvage value of equipment
𝑛: Economic age
Obsolescence cost
Obsolescence value ranges from 5-10% of depreciation cost.
Second: operating cost
a- Fuel cost
1. Equipment working by Benzin
𝐹𝑢𝑒𝑙 𝑐𝑜𝑠𝑡 = 0.23 × 𝐹 × 𝐻𝑝 × 𝑆
2. Equipment working by Dezil (gasoil)
𝐹𝑢𝑒𝑙 𝑐𝑜𝑠𝑡 = 0.15 × 𝐹 × 𝐻𝑝 × 𝑆
Where
F: operating factor (0.8-0.85)
𝐻𝑝: Horse power
𝑆: Price for liter of fuel
b- Oil cost
𝑐
𝑂𝑖𝑙 𝑐𝑜𝑠𝑡 = [0.003 × 𝐹 × 𝐻𝑝 + ] 𝐷
𝑡
Where
-6-
c: capacity of equipment tank
(litter)
t:No. of hours for oil replacement
D: price for litter of oil
Example 2.4:
Find the cost of owning and operating a shovel using the following
information:
Engine 180 Hp, working by Dezil fuel, crankcase capacity = 20 l, time

between oil changes = 150 hrs., operating factor = 0.8, useful life = 5 years,
annual operating hours = 2000 hrs, price of the equipment = 100 million
I.D. Salvage value = 20 million I.D. Price of fuel = 450 I.D. /L , oil price =
3500 I.D./L. Investment cost = 12% of average value of equipment,
maintenance and repair = 80% of depreciation, cost of operators = 5000
I.D./hr.
Solution:
a- Constant annual cost (fixed cost)
100 − 20
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = 16 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝐼. 𝐷.
5
𝑚𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝑎𝑛𝑑 𝑟𝑒𝑝𝑎𝑖𝑟 = 0.8 × 16 = 12.8 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝐼. 𝐷.
𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
100(5 + 1) + 20(5 − 1)
𝑃̅ = = 68 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝐼. 𝐷.
2×5
𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 = 0.12 × 68 = 8.16 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝐼. 𝐷.
16 + 12.8 + 8.16
𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑠𝑡 = = 0.01848
2000
= 18480 𝐼. 𝐷./ℎ𝑟
b- Operating cost
𝐹𝑢𝑒𝑙 𝑐𝑜𝑠𝑡 = 0.15 × 180 × 0.8 × 450 = 9720 𝐼. 𝐷./ℎ𝑟
20
𝑜𝑖𝑙 𝑐𝑜𝑠𝑡 = [0.003 × 0.8 × 180 + ] 3500 = 1979 𝐼. 𝐷./ℎ𝑟
150
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = 5000 𝐼. 𝐷. /ℎ𝑟
𝑠𝑢𝑚 𝑜𝑓 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = 9720 + 1979 + 5000
= 16699 𝐼. 𝐷./ℎ𝑟
-7-
𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑜𝑤𝑛𝑖𝑛𝑔 𝑎𝑛𝑑 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 = 18480 + 16699

= 35179 𝐼. 𝐷./ℎ𝑟
𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑑𝑎𝑦 = 35179 × 8 = 281432 𝐼. 𝐷.
c- Example 2.5:
A contractor has two methods to invest his money:-
1- Investment of his money in a bank of 150 million I.D. with complex
interest of 8%.
2- Purchasing a bulldozer and rent it for construction projects for 5 years
with a daily rent of 250000 I.D. You have the following information,
purchase price of a bulldozer = 150 million I.D., salvage value after 5 years
is 75 million I.D., engine 350 Hp, dizel, crankcase capacity = 30 L, time
between oil change= 120 hrs, operating factor= 0.85, No. of operating hours
per year= 2000 hr., price of fuel = 450 I.D./L , oil price = 3500 I.D./L. Cost
maintenance and repair= 0.9 of its depreciation, investment= 15% of
average value of equipment and cost of operators is 10000 I.D./hr.
which of the method will gain more profit.
Solution:
1- Complex interest:
𝑇 = 𝑃(1 + 𝑅)𝑛
𝑇 = 150 (1 + 0.08)5 = 220.399 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 I. D.
𝑃−𝑆
2- Annual depreciation =
𝑛
150 − 75
= = 15 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 I. D.
5
Annual maintenance and repair cost = 0.9 × 15 = 13.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 I. D
Investment = 0.15 × 𝑃̅
𝑃(𝑛 + 1) + 𝑆(𝑛 − 1)
𝑃̅ =
2𝑛
150(5 + 1) + 75(5 − 1)
𝑃̅ = = 120 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 I. D.
2×5
-8-
Investment = 0.15 × 120 =
18 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 I. D.
15+18+13.5
Constant annual cost = = 23250 I. D/hr.
2000
Fuel cost = 0.15 × 𝐹 × 𝐻𝑝 × 𝑆

= 0.15 × 0.85 × 350 × 450 = 20081.25 I. D./hr.
𝐶
Oil cost = (0.003 × 𝐹 × 𝐻𝑝 + ) 𝐷
𝑡
30
= (0.003 × 0.85 × 350 + ) 3500 = 3998.75 I. D./hr.
120
Operators cost = 10000 I.D./hr.

Sum of operating cost = 3998.75 + 10000 + 20081.25 = 34080 I.D./hr.
Total cost of owning and operating = 23250 + 34080 = 57330 I.D./hr.
Total cost of the equipment =57330 × 2000 × 5
= 573.3 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 I. D.
2000
Total rent money =250000 × ×5
8
= 312.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 I. D. < Total cost
∴ 𝑇ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑚𝑒𝑡ℎ𝑜𝑑 𝑔𝑎𝑖𝑛𝑠 𝑚𝑜𝑟𝑒 𝑝𝑟𝑜𝑓𝑖𝑡
HW 2.1:
Study whether to buy or to rent a bulldozer to do earth work of a project ,
by using the following information:
A-Buy the bulldozer with 120 *106 ID, the company could sail it after 8
years with 100*106 I.D .Cost of maintenance=90% of its depreciation,
annual operating hours =2000 hr. , cost of investment = 10% of its average
value, Engine 480 Hp, working by diesel fuel, crankcase capacity 30 liter,
-9-
time between oil changes = 120 hr,
operating factor = 0.8, price of fuel is 550 I.D. /L , oil price is 6000 I.D./L,
wage of driver = 15*103 I.D/hr.
B-Rent the bulldozer from the local market with 400*103 ID/day (including
all expenditures).
- 10 -

Lecture No.2 Cost of Owning and Operating Equipment

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Lecture No.2 Cost of Owning and Operating Equipment

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University of Babylon Subject: Methods of Construction and Estimation

College of Engineering Lecture No.: 2

The cost of owning and operating construction equipment

Factors affecting the cost of owning and operating equipment:

Calculation of the cost of owning and operating the equipment

Method of calculating depreciation

Book value= the price of purchase of the equipment which fixed

c- Sum of the years digits method S.Y.D.

Total Dep. Dep. During year Book value

1 5/15 112.5 5/15*112.5=37.5 87.5

2 4/15 112.5 30.0 57.5

3 3/15 112.5 22.5 35.0

4 2/15 112.5 15.0 20

5 1/15 112.5 7.5 12.5

Engine 180 Hp, working by Dezil fuel, crankcase capacity = 20 l, time

𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑜𝑤𝑛𝑖𝑛𝑔 𝑎𝑛𝑑 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 = 18480 + 16699

Fuel cost = 0.15 × 𝐹 × 𝐻𝑝 × 𝑆

Operators cost = 10000 I.D./hr.

= 312.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 I. D. < Total cost

∴ 𝑇ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑚𝑒𝑡ℎ𝑜𝑑 𝑔𝑎𝑖𝑛𝑠 𝑚𝑜𝑟𝑒 𝑝𝑟𝑜𝑓𝑖𝑡

by using the following information:

years with 100*106 I.D .Cost of maintenance=90% of its depreciation,

wage of driver = 15*103 I.D/hr.

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