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Chapter 10 Pricing EquipmentPowerPoint Presentation

Chapter 10 Pricing Equipment

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Chapter 10 Pricing Equipment Renting Equipment There can be advantages to renting rather than owning construction equipment; including: The builder does not have to keep a large collection of equipment for occasional use.

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### Chapter 10Pricing Equipment

Renting Equipment

- There can be advantages to renting rather than owning construction equipment; including:
- The builder does not have to keep a large collection of equipment for occasional use.
- The builder has continuous access to the newest and most efficient items of equipment.
- There is little or no need for equipment warehouse and storage facilities.
- There is no need for the builder to employ equipment maintenance staff.
- Accounting for equipment costs can be simpler when equipment is rented.
- There may be significant savings on company insurance premiums when a builder does not own equipment.

Owning Equipment

- The cost of owning equipment (per hour) can be considerably less than rental rates when the equipment is going to be heavily used.
- To determine ownership cost, the following aspects need to be considered:
- Depreciation expense
- Maintenance and repair costs
- Financing expenses
- Taxes
- Insurance costs
- Storage costs
- Fuel and lubrication costs

Depreciation

- Depreciation is the process of allocating the acquisition cost of an asset over its useful life.
- Terms used:
- Initial cost: the cost to acquire the item
- Useful life: number of years for which it is used
- Salvage value: estimated sales price at the end of its life

- Using straight-line depreciation:
- Annual depreciation = initial cost - estimated salvage value (vehicle) estimated useful life (years)

- The depreciation rate of tires will be different from that on the vehicle so it is calculated separately.

Maintenance and Repairs

- Maintenance and repair costs are calculated as a percentage of the annual depreciation costs.
- The percentage varies between 80% and 130%.
- When straight-line depreciation is used, depreciation in the early years will be under-estimated, but this will be offset by the maintenance allowance which will be over estimated at this time.

Equipment Overheads

- Equipment overheads include:
- Financing expenses
- Taxes
- Insurance
- Storage costs

- These expenses are often combined to form a total equipment overhead rate that is calculated as a percentage of average annual investment, where:
- Average annual investment = total initial cost + salvage value 2

Fuel and Lubrication Costs

- Fuel and lubrication oil consumption can be determined by monitoring field operations.
- If data is not available, fuel consumption information may be obtained from equipment manufacturers.
- Operating under normal conditions, a gasoline engine will consume approximately 0.06 gallons of fuel for each horsepower-hour developed.
- A diesel engine is slightly more efficient at 0.04 gallons of fuel for each horsepower-hour.
- An operating factor is used to account for times when the engine is not operating at full throttle.
- Lube oil is allowed for at 10% of fuel cost.

Pricing Equipment – Example 1

- Calculate the ownership cost per hour for a generator powered by a 20 H.P. gasoline engine based on the following:
- ENGINE: 20 H.P. gasoline
- OPERATING FACTOR: 75%
- PURCHASE PRICE: $20,000
- FREIGHT CHARGES: $600
- SALVAGE VALUE: $4,000
- USEFUL LIFE: 6 YEARS
- HOURS USED PER YEAR: 1,000
- MAINTENANCE & REPAIRS: 100% of depreciation
- EQUIP’T OVERHEAD RATE: 11%
- FUEL PRICE: $2.80 per gallon

Example 1 – Answer (1 of 2)

- Average annual investment = (total cost + salvage value) / 2
= ($20,000 + $600 + $4,000)/2

= $12,300

- Fuel Consumption = 20 x 0.06 x 75% gallons/hour
= 0.90 gallons/hour

- The annual cost of depreciation, maintenance and repairs, and equipment overheads can now be calculated:
- Annual costs:
- Depreciation = initial cost - estimated salvage value/Estimated life (years)

- = ($20,600 - $4,000) / 6 = $2,767
- Maintenance and repairs = 100% of annual depreciation = $2,767
- Equipment overheads = 11% x average annual invest. = 0.11($12,300) = $1,353
- Total annual costs: $6,887

Example 1 – Answer (2 of 2)

- Hourly costs
- Vehicle cost = total annual cost
- hours used per year
- = $6,887 / 1,000 = $6.89
- Fuel cost = fuel consumption x cost of fuel
- = 0.90 gals x $2.80 per gal. = $2.52
- Lube oil = 10% of fuel cost
- = 0.1 x $2.52 = $0.25
- Generator cost per hour: $9.66

Pricing Equipment – Example 2

- Calculate the ownership cost per hour for an excavator:
- ENGINE: 51 H.P. diesel
- OPERATING FACTOR: 60%
- PURCHASE PRICE: $30,000
- FREIGHT CHARGES: $2,000
- SALVAGE VALUE: $9,000
- USEFUL LIFE: 7 YEARS
- HOURS USED PER YEAR: 1,600
- MAINTENANCE & REPAIRS: 110% of depreciation
- TIRE COST: $1,000
- TIRE LIFE: 2,000 hours
- MAINT. & REPAIRS(TIRES): 15% of depreciation
- EQUIP’T OVERHEAD RATE: 11%
- FUEL PRICE: $2.50 per gallon

Example 2 – Answer (1 of 2)

- Average annual investment = (total cost + salvage value) / 2
- = ($30,000 + $2,000 + $9,000)/2
- = $20,500
- Fuel consumption = 51 x 0.04 x 60% gallons/hour
- = 1.22 gallons/hour
- The annual cost of depreciation, maintenance and repairs, and equipment overheads can now be calculated:
- Annual costs:
- Depreciation = initial cost – tire cost - estimated salvage
- Value estimated life (years) = ($32,000 -$1,000 - $9,000) / 7 = $3,143

- Maintenance and repairs = 110% of annual depreciation = $3,457
- Equipment overheads = 11% x average annual invest = 0.11($20,500) = $2,255
- Total annual costs: $8,855

Example 2 – Answer (2 of 2)

- Hourly costs
- Vehicle cost = total annual cost
hours used per year

= $6,887 / 1,000 = $6.89

- Fuel cost = fuel consumption x cost of fuel
= 0.90 gals x $2.80 per gal. = $2.52

- Lube oil = 10% of fuel cost
= 0.1 x $2.52 = $0.25

- Generator cost per hour: $9.66

- Vehicle cost = total annual cost

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