EQUIPMENT ECONOMICS

LECTURE – 02

Dr. Mallikarjun Pillalamarry

Department of Mining and Process Engineering
Polytechnic of Namibia
COST QUESTIONS?

 Before purchasing a equipment one must carefully analyse and answer following two
cost questions about the equipment
 How much does it cost to operate a machine on a projects?
 This question seeks to identify the expenses associated with productive machine work and is
commonly referred to as ownership and operating (O&O) cost
 What is the optimum economic life?
 This question seeks to identify the optimum point time to replace a machine
 The process answering this question is known as replacement analysis
EQUIPMENT CLASSIFICATION

 Equipment may be classified according to the following

 The type of work it performs
 As standard equipment which is commonly manufactured and available to prospective
purchaser with readily accessible spare parts
 As special equipment which has to be manufactured for a specific project or which does
not have a accessibility to spare parts
EQUIPMENT PROCUREMENT

 How to determine what kind and size of equipment seems to be most suitable for a
given project
 Provide right equipment at the right time and place so work can be accomplished at
lowest cost
 Specific objectives
 Minimise ownership and operating cost
 Increase availability
 Increase utilisation
DATA ACQUISITION

 Following data is useful to have when selecting a right equipment

 Machine identification
 Utilisation data
 Purchase cost
 Repair cost
 Operating cost (fuel, oil, etc.)
UTILISATION

 Utilisation is the amount of time equipment is operational verses available time

 Utilisation is measured on the basis of
 Hourly
 Daily
 Weekly
 Kilometres
 Fuel consumption
ESTIMATION OF CAPITAL COST

 Capital costs are commonly estimated by three methods, or a combination thereof.

 A quick estimate where a "rule of thumb" is used such as dollar per tonne erected
multiplied by the weight of the machine
 Budget estimates from suppliers or manufacturers (which can have a plus or minus 20%
variation to allow for exchange rate variations and a margin for negotiation)
 Actual tender or contract bids which are definitive and binding
OWNERSHIP COST

 Ownership cost is the cumulative results of those cash flows an owner experiences
whether or not the machine productively employed on a job
 The most significant cash flow affecting ownership cost are
 Purchase expenses [outflow]
 Salvage value [inflow]
 Major repairs and overhauls [outflow]
 Property taxes [outflow]
 Insurance [outflow]
EXPECTED OPERATING LIFE OF EQUIPMENT (HOURS)

Equipment Poor Condition Average Condition Good Condition

Dozer
Crawler 10, 000 15, 000 20, 000
Wheel 8, 000 12, 000 15, 000
Grader 12, 000 16, 000 20, 000
Front End loader 10, 000 15, 000 20, 000
Hydraulic Excavator 20, 000 30, 000 40, 000
Scraper 8, 000 12, 000 16, 000
Truck
Bottom dump 30, 000 40, 000 50, 000
Rear-dump small 15, 000 20, 000 25, 000
Rear dump large 20, 000 30, 000 100, 000
EXPECTED OPERATING LIFE OF EQUIPMENT (HOURS)

Equipment Poor Condition Average Condition Good Condition

Drill
Small 16, 000 20, 000 30, 000
Large 60, 000 120, 000 150, 000
Bucket wheel excavator 60, 000 120, 000 150, 000
Conveyors 60, 000 120, 000 150, 000
Crushers 60, 000 120, 000 150, 000
Dragline 60, 000 120, 000 150, 000
Shovels 60, 000 120, 000 150, 000
Spreaders 60, 000 120, 000 150, 000
OPERATING CONDITIONS – GOOD CONDITIONS

 Material is relatively loose and free flowing

 Equipment operates with considerable low power
 Long life of wear items can be expected due to lower abrasiveness
 Low digging power is required and material heaps well into the bucket
 Tyres wear out rather than fail due to cuts and abrasions
 There is a ready supply of spare parts and the work force is relatively skilled
OPERATING CONDITIONS – AVERAGE CONDITIONS

 Material requires blasting to maintain productivity

 Some power is required to penetrate the bank and the material heaps reasonably
well
 The engine has periods of full power but still some idle periods
 Wear rates are moderate
 There is an average supply of spare parts and the workforce has average skills
OPERATING CONDITIONS – POOR CONDITIONS

 Higher powder factors are required for blasting and often the material is bulky,
irregular in shape and has poor fill factors
 The engine is often at full power
 Tyres fail due to rock cuts and abrasions
 Wear rates are high and component life is reduced
 There are limited skills in the workforce causing higher repair costs
OPERATING COST ESTIMATION - INFORMATION REQUIRED

 For more detailed estimates require  Transportation charges and any special
following specific information requirements
 The origin of the quote  Erection costs including the labour and
material component
 The country of origin of the equipment
and the appropriate exchange rate  The delivery time including
commissioning
 The price of the standard item of plant
FOB factory  The payment schedule

 A list of options such as training, spare  The recommended spare parts holding
bucket, transformers, ropes and air
conditioning
NEED SPECIAL ARRANGEMENT TO TRANSPORT
DERIVATION OF OPERATING COST

 Following steps involved deriving operating cost

 Establish an estimate of the capital cost of the item of equipment
 Dissect the machine into cost elements such as tyres, fuel, power and labour
 Subdivide each cost element into component parts
 Assign a life or utilisation to each component part and calculate hourly cost
 Total all the components to achieve the total hourly operating cost
OPERATING COST OF EQUIPMENT

 Operating cost of equipment  Operating labour

 Power  Maintenance labour
 Fuel
 Lubrication
 Tyres
 Repair parts such as filters and hydraulic
hoses
 Wear parts such as teeth and bits
POWER ENERGY DEMAND

 This covers the electrical power costs required to operate the machine
 This can be subdivided into an "energy component" as well as a "demand" component which
reflects the required installed capacity of the power generation facility
 Demand charge comes about because of the cyclical loads of most mining machines and the
electricity authority must be able to supply high power for short periods of time
 For quick estimates (a "rule of thumb“ applicable to the coal industry) the average power for
a shovel is 0.6 kW per cubic metre per hour and 1.5 kW per cubic metre per hour for a
dragline
FUEL COST

 Fuel costs are based on:

 Unit cost of fuel
 The engines fuel consumption rate
 The fuel usage depends on conditions of the engine, the duty cycle, the operator skill
and road conditions
 Fuel consumption at 100% load factor approximates to 0.3 litres per hour per kW
 Load factors range from 0.25 to 0.8
FUEL LOAD FACTORS

Equipment Poor Conditions Average Conditions Good Conditions

Dozer 0.6 0.5 0.4
Grader 0.6 0.5 0.3
Front End Loader 0.6 0.5 0.4
Hydraulic Excavator 0.6 0.5 0.4
Scraper bowl 0.6 0.5 0.4
Truck 0.4 0.3 0.2
Drills 0.6 0.5 0.4
LUBRICATION

 Lubrication charges are usually calculated as a percentage of the hourly fuel cost
 These proportions range from 15%for equipment with a relatively low proportion of
hydraulic componentry (such as a tractor trailers) up to 30-40% for equipment with
a high proportion of hydraulic componentry (such as a hydraulic excavator)
 Alternatively the consumption rate can be expressed as either litres/hour or kg/hour
which can be obtained from manufacturers or operational records
 This is a more accurate method and is possibly the only method for equipment such
as draglines which consume substantial quantities of lubricants but no fuel oil
TYRES
 Total tyre costs are obtained by multiplying the cost of each tyre by the number of
tyres and dividing by the hourly life, tyre manufacturers give guidelines for calculating
hourly life
 The tyre life can vary from 1,500 hours to 12,000 hours depending on site conditions
 This is usually a base number of hours (4,000 is a common base) multiplied by a
series of factors
 These factors account for
 Road and work conditions
 Tyre maintenance condition
 Amount of overloading
 Speed
 The number of curves and
 Surface conditions including temperature grade
MAINTENANCE SUPPLIES

 Two types of formulae for estimation of maintenance supplies are used

 The first general formula which is appropriate for large equipment such as shovels,
draglines, and crushing conveying systems is to multiply the capital costs by a
percentage and divide this by a number of operating hours per year
 Typical values for the percentage range from 3% to 10%. the appropriate adjustments
would be made for job conditions
 The second method uses a standard operating life of 10,000 hours and then
calculates the maintenance repair parts cost by multiplying the initial capital cost by a
repair factor and then dividing this by the standard operating life to get an hourly
rate
REPAIR FACTORS – STANDARD LIFE

 This is adjusted if the number of hours is greater than the standard operating life and
then further adjusted for job conditions

Equipment Repair Factor Job Condition

Poor Average Good
Dozer 0.25 1.1 1.0 0.8
Grader 0.20 1.3 1.0 0.8
Front End Loader 0.25 1.4 1.0 0.8
Hydraulic Excavator 0.15 1.5 1.0 0.8
Scraper 0.20 1.4 1.0 0.8
Truck 0.20 1.2 1.0 0.5
REPAIR FACTORS – EXTENDED LIFE

Equipment Extended Life Factor (Hrs)

10k 15k 20k 30k 40k 50k
Dozer 1.00 1.10 1.30 NA NA NA
Grader 1.00 1.10 1.20 NA NA NA
Front End 1.00 1.1 1.30 NA NA NA
Loader
Hydraulic 1.00 1.05 1.10 1.20 1.30 1.40
Excavator
Scraper 1.00 1.10 1.20 NA NA NA
Truck 1.00 1.05 1.10 1.20 1.10 NA
OPERATING SUPPLIES

 Operating supplies can also be referred to as wear parts or ground engaging tools
 Wear items include bucket teeth, ripper boots, drill bits, cutting edges and so on
 These are usually separately itemised as they are directly related to the ground
conditions
 An approximate method is to take a factor of the capital cost which is the same logic
such as for maintenance supplies
 Typical factor is 5 x 10-6
MAJOR OVERHAULS

 Major overhauls cover the cost of major component exchange or rebuild

 This can be estimated as a percentage of initial capital cost (such as 15% every
12,000 hours) or as a build up of components and their life
 For example, a truck could be subdivided into engine, transmission, body, frame, electrical
and so on
 The cost of each of these major components can then be estimated with the
estimated life
 This gives a standard cost per hour even though the actual expenditure may only
occur when the damage or rebuild is implemented
OPERATING LABOUR COST

 This covers the cost of the person(s) operating the 'machine’

 The shift configuration needs to be decided to determine the operating labour requirement
 Industrial practices also need to be incorporated such as whether or not an "oiler" is
required
 For example, a dragline requires an operator and a oiler on a continuous shift

 In allocating personnel, allowance should also be made for the availability of equipment
 Unavailable mobile equipment is normally not manned
 Large fixed or semi-mobile production equipment is manned even when it is unavailable
OPERATING LABOUR COST

 Operator ratio which refers to the number of men per operating shift required to
operate the machines
 This ratio can take into account
 The shift roster
 Amount of absenteeism
 Availability of the equipment and whether or not it is manned when it is unavailable
MAINTENANCE LABOUR

 There is no easy method to estimate maintenance repair costs, and factors to allow for are
 How much work is done offsite such as component exchange
 Job conditions
 Skill and experience of operators and maintenance personnel
 Proximity of spare parts and support
 Union requirements such as whether or not a tradesman assistant is required to assist the fitter on
the job
 Philosophy of maintenance management
MAINTENANCE LABOUR

 The maintenance ratio is the ratio of repairman hours required per machine
operating hour
 This ratio can be determined from handbooks, historical records or by back
calculation from the maintenance repair costs per machine per operated hour
 The ratio changes with the duty of the machine such as a dozer on ripping versus a
dozer or stockpile on duties.
MAINTENANCE LABOUR

Equipment Average Condition

Dozer 0.5
Grader 0.3
Front End Loader 0.8
Scraper 1.5
Rear Dump Truck 0.7
REPLACEMENT DECISIONS

 A piece of equipment has two lives

 Physically limited working life
 Cost limited economic life
 A machine in good mechanical condition and working productively enjoys a strong
bias in favour of its retention in the equipment inventory
 All costs must be examined when considering a replacement decision
EFFECT OF CUMULATIVE USAGE ON COST
REPLACEMENT DECISION

 If owner is considering only purchase price and expected salvage, the number argue
that the machine should not be traded
 If only operating cost is examined, the owner would want to trade the machine after
first year
 For correct analysis both cost must be considered
EXAMPLE REPLACEMENT ANALYSIS

 A small dozer is purchased for $1 060 000. A forecast expected operating hours,
salvage value and maintenance expenses are as follows

Year Operating hours Savage ($) Maintenance Expenses ($)

1 1850 795, 000 33, 400
2 1600 636, 000 39, 000
3 1400 763, 200 44, 600
4 1200 742, 000 50, 000
5 800 636, 000 66, 000
RENT AND LEASE CONSIDERATIONS

 There are three basic methods for securing a particular machine to use on a project
 But ( direct ownership)
 Rent
 Lease
 Ownership guarantees control of machine availability and mechanical condition, but
requires continuing use of equipment to pay for the machine
 Ownership may force a company into using obsolete equipment
RENTAL

 Rental of a machine is a shot-term alternative to direct equipment ownership

 Advantage of rental is company can pick the machine that exactly suited for the job
at hand
 This option is good when if the job is short duration of if company does not foresee
a continuing need of a particular type of equipment
 Direct ownership assumes a continuing need and utilisation of the equipment
 With the rental company loses the tax depreciation shield of machine ownership but
gains a tax deduction because of rental payments are consider as expenses
RENTAL - DISADVANTAGE

 Rental company may have limited number of machine

 During the peak season all types of equipment may not available
 Many specialised or custom machine cannot be rented
RENTAL -

 Equipment cost is very sensitive to changes in use hours

 Fluctuation in maintenance expenses or purchase price barely effect the cost per
hour
 Decrease in use hours per year can make the difference between cost effective
machine ownership and renting
 When investigating a rental critical question is usually expected hours of usage
EXAMPLE

 Consider a small wheel loader with an ownership cost of N$ 109.6 per hour. Cost is
based on assumption that the machine will work 2, 400 hours each year of its service
life. Hence yearly ownership cost is N$ 263, 040.
 Checking with local renal company, the mine receives rental quotes of N$ 35580 per
month, N$11 820 per week, and N$3690 per day.
 What are the breakeven working hours for all four options?
LEASE

 A lease is a long term agreement for the use of an asset

 It provides alternative to the direct ownership
 The lessor receives lease payments in return providing the machine
 A conventional lease will have one of three end of lease options
 Buy the machine at fair market value
 Renew the lease
 Return the equipment to the leasing company
 Advantage of lease of equipment is working capital not tied up in equipment
MORE ADVANTAGES

 Inflow: initially of the equivalent value of the machine

 Outflow: Periodic lease payments
 Loss of salvage value when the machine is returned to the lessor
INTEREST AND PAYMENTS
 Money can be regarded as a commodity that may be circulated to purchase
goods or services
 If we borrow money to buy a certain item then we are, in effect, renting the
use of that money
 We must expect, therefore, that in addition to returning the borrowed sum,
we must also pay a rental fee
 Barrowing an amount of money, P (principal) at a fractional interest rate i
then we will owe the sum S where
Now S=P
After 1 year S=P(1+i)
After 2 year S=P(1+i) (1+i)
After n year S=P(1+i)n
 Chapter 9. Ventilation Planning Malcolm J. McPherson

If we borrow an amount of money, P (principal) at a fractional interest rate i (e.g. at 9 per cent, i =

EFFECT OF COMPOUNDING INTEREST

0.09) then we will owe the sum S where

Now S = P
after 1 year S = P (1+i)
after 2 years S = P (1 + i) (1 + i) = P(1 + i)2
after 3 years S = P(1 + i)3
n
after n years S = P(1 + i) (9.8)
Figure 9.3 gives a visual indication of the effects of compounding interest each year.

100
Annual rate of interest = 20 % 18
16
14

12
Value of $1 after n years
10

8
10

1
0 5 10 15 20 25 30 35
Years n

Figure 9.3 Effect of compounding interest.

PRESENT VALUE

 The time variation of the value of money makes it inequitable to compare two
sums that are borrowed or spent at different times
 We need a common basis on which both sums can be fairly evaluated
 One method of doing this is to determine what principal or capital, P, we need
to invest now in order that it will grow to a desired sum, S, in a specified
number of years
S
P=
(1+i) n

 If all future investments or expenditures are reduced to present values then

they can correctly be compared
PRESENT VALUE OF REGULAR PAYMENTS

 In the case of operating costs, payments must be made each year. Such future
payments may also be expressed as present values in order to compare and
compound them with other expenditures
 If operating costs, So, to be constant and paid at the end of each year. Then at the end
of the first year (n = 1), present value of the first year's annual operating cost So is
S0
P0,1 =
(1+i)
 Po,1 = Present value of the first year's annual operating cost So: at an interest rate of i
PRESENT VALUE OF REGULAR PAYMENTS

 Similarly, the present value of the same operating cost, So, in the second year (n = 2)
is So
P0,2 =
( )
1+ i
2

 It follows that the total present value, Po, of operating costs, So paid at each year-end
for n years becomes
é 1 1 1 1 ù
Po = So ê + 2 + 3 +-------+ n ú
ë (1+i ) (1+i) (1+i) (1+i) û
 The term inside the bracket is a geometric progression which can be summed to give
Sé 1 ù
Po = ê1- ú
i ë (1+i)n û
EQUIVALENT ANNUAL COST

 When capital is borrowed, it is often more convenient to repay it, including interest,
in equal installments each year, rather than as a lump sum paid at the end of the
complete time period
 If S is the regular payment, or annual equivalent cost, to be met each year in order to
pay off the capital and interest on a borrowed amount, P. Then Equivalent Annual
Cost (EAC) is
P *i
EAC =
é 1 ù
ê1- n ú
ë (1+i ) û
REFERENCE

 Peurifoy, R.L., Schexnayder, C.J., Construction Planning, Equipment and Methods, Chapter:
Equipment Economics.
 Westcott, P.C., 1990, Capital and operating cost estimation for open pit mining equipment,
Conference ‘MINECOST’