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Construction Equipment Costs: Courtesy of Dr. Emad Elbeltagy

The document discusses methods for estimating costs associated with construction equipment, including ownership costs like depreciation and operating costs. It provides details on three common depreciation methods - straight-line, sum-of-years digits, and sinking fund. The straight-line method allocates depreciation equally over the useful life. The sum-of-years digits method results in faster depreciation earlier in the asset's life. The sinking fund method assumes deposits are made each year to accumulate and grow to the asset's depreciated value by the end of its life. An example is provided to illustrate calculating depreciation and equipment costs using each method.

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Bruce Doyaoen
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145 views30 pages

Construction Equipment Costs: Courtesy of Dr. Emad Elbeltagy

The document discusses methods for estimating costs associated with construction equipment, including ownership costs like depreciation and operating costs. It provides details on three common depreciation methods - straight-line, sum-of-years digits, and sinking fund. The straight-line method allocates depreciation equally over the useful life. The sum-of-years digits method results in faster depreciation earlier in the asset's life. The sinking fund method assumes deposits are made each year to accumulate and grow to the asset's depreciated value by the end of its life. An example is provided to illustrate calculating depreciation and equipment costs using each method.

Uploaded by

Bruce Doyaoen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CONSTRUCTION

EQUIPMENT
COSTS

Courtesy of Dr. Emad Elbeltagy


AGENDA
Construction Equipment Costs
Depreciation
CONSTRUCTION EQUIPMENT
COSTS
 Estimating equipment cost involves identifying the ownership and
operating 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


INITIAL COST

 The initial cost is the total cost required to purchase a piece of


equipment
 This initial cost is the basis for determining other costs related to
ownership as well as operating costs
 Generally, initial cost is made up of:
 Price at the factory or used equipment price,
 Extra options and accessories,
 Sales tax,
 Freight
 Assembly or setup charges
 The initial cost is very straight forward and calculated through the
depreciation cost
INVESTMENT COST
(COST OF FINANCE)
 The purchase of construction equipment requires a significant
investment of money.

 This money either be borrowed from a lender, or it will be taken


from reserve fund of the contractor

 In order to calculate the cost of finance, both the purchase price, P,


and the salvage value, F, should be
INVESTMENT COST
(COST OF FINANCE)
 Example: An excavator purchase price is LE460,000 and its salvage
value is LE40,000 after 10 years of useful life. Find the annual cost
of finance of this excavator if the annual interest rate is 15%

 P = 460,000; F = 40,000; n = 10; i = 15%

 Annual cost of finance = LE47,684/year


OPERATION COSTS

 Operating cost accrue only when the equipment is used, whereas


ownership costs accrue whether or not the equipment is used

 Operating costs include maintenance and repairs, fuel, oil and


lubricants

 The cost for maintenance and repairs include the expenditures for
parts and labor required to keep the equipment in good condition

 The annual cost of maintenance and repairs is often expressed as a


percentage of purchase prices or as a percentage of the straight-
line depreciation costs
OPERATION COSTS

 Fuel consumption:
 A gasoline engine consume approximately 0.06 gallon of fuel for each
horsepower-hour.
 A diesel engine consume approximately 0.04 gallon of fuel for each
horsepower-hour
 Lubricating oil consumption: The quantity of lubricating oil consumed
by an engine varies with the engine size , the capacity, the equipment
condition and number of hours between oil change
 Cost of rubber tires: tires life usually not be the same as the
equipment on which they are used
 Thus, the cost of depreciation and repairs for tires should be estimated
separately from the equipment
EXAMPLE

Calculate the hourly rate of equipment based


on the following data:
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%
EXAMPLE

 Depreciation (assume straight-line)


= (460000 – 40000) / 10 = LE42000/year
 Investment annual cost is calculated as follows:

  0.1 5(1.15)10  460000   0.15  40000


460000 10
 −  − 40000 10
 − 
  (1.15) − 1  10    (1.15) − 1  10 
 Annual investment = LE47684/year
EXAMPLE

 Maintenance and repair cost = 0.1 × 460000


= LE46000/year
 Operating costs = LE47000/year
 Then, the total annual costs
= 42000 + 47684 + 46000 + 47000 = LE182684/year
 Accordingly, the hourly cost = 182684/ 2000
= LE91.34/hr
DEPRECIATION
DEPRECIATION
 The depreciation: is defined as “the decrease in market
value of an asset over time” through wear, deterioration
or obsolescence

 A machine may depreciate (decline in value) because it


is wearing out and no longer performing its function

 Another aspect of depreciation is that caused by


obsolescence

 A machine is described as obsolete when the function it


performs can be done in some better manner
DEPRECIATION
 As asset always has different values: initial value (P), book value
(BV), salvage value (F) and market value (MV)

 The initial value: represents the purchase price of an asset

 Salvage value: represents the expected price for selling the asset
at the end of its useful life

 The book value: represents the current value in the accounting


systems. It equals the initial value of the asset minus all the
depreciation costs till given time. The book value is always
calculated at the end of each year

 The market value: represents the value of the asset if it is sold in


the free market. It is not necessary that the book value equals the
market value
DEPRECIATION
 There are three common methods for calculating
depreciation:

 Straight-line,

 Sum-of-years digits

 Sinking fund method.

 Each method involves the spreading of the amount


to be depreciated over the recovery life of an asset
in a systematic manner
DEPRECIATION
 The straight-line method assumes linear
depreciation or the depreciation cost is allocated
equally over the asset useful life

 The sum-of-years digits assumes high rate of


depreciation at the early age of an asset and
decreasing rate at its aged life

 The sinking fund method assumes lower rate at the


early ages and faster rate at the late age
1.THE STRAIGHT LINE METHOD

 In this method a constant depreciation charge is made

 The total amount to be depreciated (initial value, P –


salvage value, F) is divided by the useful life, N years

 (Annual depreciation charge) Dn = (P – F) / N

 The book value at any time, n, could be calculated as


follows

 BV(n) = P – nDn
1.THE STRAIGHT LINE METHOD

 Example: If an asset has a initial value of LE50,000


with LE10,000 salvage value after five years.
Calculate the annual depreciation and calculate the
book value of the asset after each year
1.THE STRAIGHT LINE METHOD

 Annual depreciation:

 Dn = (P - F) / N = 50,000 - 10,000 / 5 = LE8,000 per year

 Book value of the asset after each year:

 BV(n) = P – nDn (n = 1, 2, 3, 4, 5)

 BV(1) = 50,000 – (1) 8,000 = LE42,000

 BV(2) = 50,000 – (2) 8,000 = LE34,000

 BV(3) = 50,000 – (3) 8,000 = LE26,000

 BV(4) = 50,000 – (4) 8,000 = LE18,000

 BV(5) = 50,000 – (5) 8,000 = LE10,000 = F


2.SUM-OF-YEARS DIGITS METHOD

 This method results in faster depreciation at the early


life of an asset and smaller charges as the asset nears
the end of its estimated life

 Each year, the depreciation charge is computed as the


remaining useful life at the beginning of the year divided
by the sum of the years digits for the total useful life,
with this ratio multiplied by the total amount of
depreciation (P – F)

 Thus means that the depreciation is calculated as the


percentage of the remaining life to the original life
2.SUM-OF-YEARS DIGITS METHOD

 Dn = (Remaining useful life at beginning of a year /


Sum of years digits) × (P – F)

 Sum of years digits = N (N + 1) / 2

 Ν - n +1 
Dn =   × (P − F )
 N ( N + 1)/2 
2.SUM-OF-YEARS DIGITS METHOD

 Example: If the purchase price of an equipment is


LE60,000 and its salvage value after 8 years is
LE6,000, calculate the annual depreciation and the
book value of the equipment each year.

 P = 60,000; F = 6,000; N=8

 Sum-of-years digits = 8 (8 + 1) / 2 = 36 years


2.SUM-OF-YEARS DIGITS METHOD

Remaining life / sum- Annual


Year Book value
of-years depreciation
0 0 0 60,000
1 8/36 12,000 48,000
2 7/36 10,500 37,500
3 6/36 9,000 28,500
4 5/36 7,500 21,000
5 4/36 6,000 15,000
6 3/36 4,500 10,500
7 2/36 3,000 7,500
8 1/36 1,500 6,000
3.SINKING FUND METHOD

 This method assumes that a uniform series of payments


are deposited into an imaginary fund at a given interest
rate i

 The amount of the annual deposit is calculated so that


the accumulated sum at the end of the asset life will
equal the value of the asset depreciated (P – F)

 The amount of yearly depreciation is invested in a


compound manner for the remaining period
3.SINKING FUND METHOD

 i 
A = (P − F ) ×  n 
 (1 + i ) − 1 
 Then the depreciation value, Dn, at any year n is
calculated

 Dn = A × (1 + i)n-1 ; n = 1, 2, 3, …….. ……., N


3.SINKING FUND METHOD

 Example: If the purchase price of an equipment is


LE60,000 and its salvage value after 8 years is LE6,000,
calculate the annual depreciation and the book value of
the equipment each year.

 P = 60,000; F = 6,000; N = 8; i =10%


3.SINKING FUND METHOD

 A = (60000 – 6000) × [(0.1) / (1.18 – 1)] = LE4,722

 Accordingly, the annual depreciation could be calculated as :

 At the first year: D1 = = LE4,722

 At the second year: D2 = 4722 × (1.1) = LE5,194

 At the third year: D3 = 4722 × (1.1)2 = LE5,714

 ……………..

 At the eighth year: D8 = 4722 × (1.1)7 = LE9,202


3.SINKING FUND METHOD

Year Annual depreciation Book value

0 0 60,000
1 4,722 55,278
2 5,194 50,084
3 5,714 44,370
4 6,285 38,085
5 6,913 31,172
6 7,605 23,567
7 8,365 15,202
8 9,202 6,000
DEPRECIATION
Initial value

Sinking fund

Book
value
Straight- line

Sum-of years

Salvage value

Age
DR. AHMED ELYAMANY
CELL: 010-94-100-824
EMAIL: [email protected]
WEB PAGE: HTTP://DRAHMEDELYAMANY.WEEBLY.COM/

QUESTIONS

30

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