Unit 6

Cost of Equipment

ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh

 Introduction
• A thorough understanding of both estimated and actual costs of operating
and owning equipment drives profitable equipment management.
• Plant, equipment, and tools used in construction operations are priced in
the following three categories in the estimate:
1. Small tools and consumables
2. Equipment usually shared by a number of work activities
3. Equipment used for specific tasks
• Total equipment costs comprise two separate components:
a. Ownership costs
b. Operating costs

ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh

 Ownership cost
• Ownership costs are fixed costs that are incurred each year, regardless of
whether the equipment is operated or idle.
• The costs that fall under ownership cost are:
1. Initial Cost
2. Depreciation
3. Investment Cost
4. Insurance Tax and Storage Cost
5. Cost of an operator and helper

ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh

 Ownership cost (cont.)
1. Initial cost
• 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 construction site, and
having the equipment ready for operation.
• Initial cost consists of the following items:
a. Price at factory + extra equipment + sales tax
b. Cost of shipping
c. Cost of assembly and erection

ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh

 Ownership cost (cont.)
2. Depreciation
• Depreciation represents the decline in market value of a piece of
equipment due to age, wear, deterioration, and obsolescence.
• Depreciation can result from:
i. Physical deterioration occurring from wear and tear of the machine
ii. Economic decline or obsolescence occurring over the passage of time
• In the evaluaion of depreciation, some factors are explicit while other
factors have to be estimated.
a. Initial cost: The amount needed to acquire the equipment .
b. Useful life: The number of years it is expected to be of utility value .
c. Salvage value: The expected amount the asset will be sold at the
ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh
 Ownership cost (cont.)
end of its useful life
• The exact length of the useful life of the asset and the precise amount of
salvage value is uncertain.
• Any assessment of depreciation, therefore, requires these values to be
estimated.
• Of the several methods in use, the following three are commonly used in
case of depreciation, of equipment.
a. Straight line method
b. Declining balance method
c. Sum of the years digits method

ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh

 Ownership cost (cont.)
a. Straight line method
• Straight-line depreciation is the simplest to understand as it makes the
basic assumption that the equipment will lose the same amount of value
in every year of its useful life until it reaches its salvage value.
• Salvage value is deducted from the price of equipment and only the actual
amount lost during the useful life of the equipment is depreciated.
• The depreciation in a given year can be expressed by the following
equation:
𝐼𝐶 −𝑆
Dn =
𝑁
Where, IC = Initial Cost, S = Salvage Value and N = Useful life of the asset
ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh
 Ownership cost (cont.)
• The book value of asset in a particular year is the difference between the
purchase price and cumulative depreciation up to the year under
consideration.
Book value = Initial Cost – total depreciation charges
𝑩𝒏 = IC − (𝑫𝟏 + 𝑫𝟐 + 𝑫𝟑 + ⋯𝑫𝒏)
Example:
Consider the following data on an automobile:
Initial Cost = $10,000
Useful life = 4 years
Estimated Salvage Value = $2,000
Calculate the book value of the equipment at the end of each of the year.
ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh
 Ownership cost (cont.)
Solution:
Given,
Initial Cost (IC) = $10,000
Useful life (N) = 4 years
Estimated Salvage Value (S) = $2,000
Total amount consumed during useful life of the equipment is,
IC - S = $ (10,000 – 2,000) = $ 8,000
Therefore, depreciation Dn is,
𝐼𝐶 −𝑆 $ 8,000
Dn = = = $ 2,000 per year
𝑁 4

ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh

 Ownership cost (cont.)
The asset would then have the following book values at the end of each year.
End of year Depreciation Book value
1 $ 2,000 $ 8, 000
2 $ 2,000 $ 6,000
3 $ 2,000 $ 4,000
4 $ 2,000 $ 2,000

b. Declining balance method

• In this method, a fixed fraction of the initial book balance is deducted each
year. The fraction or declining balance rate is obtained by
d = 1/N
• The most common multiplier is ‘1’. If this is ‘2’ then it is called double-
declining balance method.
ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh
 Ownership cost (cont.)
• For declining balance method
𝐷1 = 𝑑 x IC
𝐷2 = 𝑑(IC − 𝐷1) = 𝑑 x IC(1 − 𝑑)
𝐷3 = 𝑑(IC − 𝐷1− 𝐷2) = 𝑑 x IC(1− 𝑑)2
For ‘n’ year, 𝐷𝑛 = 𝑑 x IC(1 − 𝑑)𝑛
• We can also compute the total Declining Balance depreciation at the end
of ‘n’ years
TDB = 𝐷1 + 𝐷2 + 𝐷3 + 𝐷4 +…..+𝐷𝑛
= d x IC + d x IC(1-d) + d x IC(1−d)2+….+d x IC(1−d)𝑛−1
TDB = IC[1-(1−d)𝑛]

ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh

 Ownership cost (cont.)
Example:
A piece of equipment costing $ 110,000 at the time of purchase has salvage
value of $ 10,000 at the end of its useful life of 10 years. Calculate the rate of
depreciation, yearly depreciation and book value of the equipment for each
of the years during useful life of the equipment.

ECM 524 Management of Construction Plant and Equipment Shacheendra K Labh

Thank you!