Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipment

Transcription

1 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent Chapter 2 Factors Affecting the Selection of Construction Equipent 2. Factors Affecting the Selection of Construction Equipent 2.1. General Inforation: A proble which frequently confronts a contractor as he plans to construct a project is the selection of the ost suitable equipent. He should consider the oney spent for equipent as an investent which he can expect to recover with profit during the useful life of the equipent. A contractor does not pay for the construction equipent; the equipent ust pay for itself by earning for the contractor ore oney than it cost. A contractor can never afford to own all types or sizes of equipent that ight be used for the kind of work he does. It ay be possible to deterine what kind and size of equipent see ost suitable for a given project, but this inforation will not necessarily justify the purchase of the equipent, he ay own a type of equipent that is less desirable than the proposed one, but, it ay be of benefit and less expensive than the proposed one. "Anytie a unit of equipent will pay for itself on work certain to be done, it is a good business to purchase it. For exaple, if a unit of equipent costing $25000 will save $50000 on a project, a contractor is justified in purchasing it regardless of the prospects of using it on additional projects, or the prospects of selling it at a favorable price when the project is finished." 2.2. Standard Types of Equipent: There is no clear definition of standard equipent. Equipent that is standard for one contractor ay be special for another. But it ay be defined as the equipent that can be used econoically on ore than one project, its repair parts ay be obtained ore quickly,and it can be easily disposed of at ore favorable price Special Equipent: It is the equipent that is anufactured for use on single project or for a special type of operation. Such equipent ay not be suitable or econoical for use on other project. 4

2 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent 2.4. Replaceent Parts: Prior to purchasing equipent, the buyer should deterine where spare parts are obtainable; otherwise the project ay be delayed. If parts are not obtainable quickly, it ay be wise to purchase other equipent, for which parts are quickly available, even though the latter sees less desirable The Cost of Owing and Operating Construction Equipent: There are several ethods of deterining the probable cost of owning and operating construction equipent. No known ethod will give exact costs under all operating conditions. At best the estiate is only a close approxiation of the cost. Kept records for equipent previously used should give inforation which ay be used as a guide for the particular equipent it was used under the sae conditions. Factors that affect the cost of owning and operating construction equipent include: 1. The cost of the equipent delivered to the owner. 2. The severity of the conditions under which the equipent is used. 3. The nuber of hours the equipent is used per year. 4. The nuber of years the equipent is used. 5. The care with which the owner aintains and repairs the equipent. 6. The deand for used equipent when it is sold, which will affect the salvage value. When it is necessary to estiate the cost of owning and operating construction equipent prior to purchasing it, cost records, based on past perforance generally will not be available, therefore the following costs should be considered: Ownership Costs: Depreciation cost Investent Cost Depreciation Cost: Depreciation:Is the loss in value of a piece of equipent over tie, generally caused by wearand tear fro use, the profitable owner of equipent ust recover this loss during its useful life. 5

3 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent Depreciation Accounting Value: The depreciation accounting value (usually tered book value), is the systeatic allocation of the costs of a capital investent over soe specific nuber of years. This value can be calculated by subtracting the depreciation at year ties the no. of the year () fro the actual cost of equipent. There are nuber of ethods to calculate the depreciation, but before calculating it using any ethod, close estiation of the following ites ust be known: 1. The purchase price (tered P). 2. The econoic life of the equipent (tered N). 3. The estiated resale value at the close of the econoic life, known as salvage value (tered S). With these three ites of inforation known or estiated, the depreciation can be calculated; the ost coonly used ethods are the following: 1. Straight-line (SL) ethod. 2. Su-of-the-years (SOY) ethod. 3. Declining-balance ethod. Straight-line ethod (SL): This ethod is the easiest one to calculate and probably the ost widely used ethod in construction. The annual aount of depreciation (D), for any year (), is a constant value, and thus the book value decreases at a unifor rate over the useful life of the equipent. The equations used are: 1 N Depreciation rate, R (2-1) Annual depreciation aount, ( ) ( P S) D R P S (2-2) Book value at year, Or: Book value at year, BV BV N P D (2-3) BV 1 D... (2-4) Exaple: A piece of equipent is available for purchase for ($12000), has an estiated useful life of (5 years), and an estiated salvage value of ($2000). Deterine the depreciation and the book value for each of the 5 years using the SL ethod. 6

4 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent Solution: 1 R 5 D 0.2 ( ) $ 2000 per year BV -1 D BV Su-of-the-years ethod (SOY): This is an accelerated ethod, which is a ter applied to accounting ethods which perit rates of depreciation faster than straight line. The rate of depreciation is a factor ties the depreciable value (P-S). This factor is calculated as follows: N + 1 R SOY N N (2-5) ( ) SOY... (2-6) SOY can be calculated by a accuulating the years of the equipent life such as if the useful life was 5 years then SOY D BV N + 1 SOY N + 1 P D P ( P S) SOY R ( P S) ( P S) (2-7) or BV BV 1 D... (2-8) Exaple: A piece of equipent is available for purchase for ($12000), has an estiated useful life of (5 years), and an estiated salvage value of ($2000). Deterine the depreciation and the book value for each of the 5 years using the SOY ethod. Solution: N ( N + 1) 5( 5 + 1) Using Eq. (2-6): SOY, or SOY

5 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent Using Eq. (2-5): R N SOY Using Eq. (2-7): D D D R ( P S) ( ) R ( 10000) ( 10000) Then tabulate the results as follows: year R D BV ( 10000) 3333 ( 10000) 2667 R R ( 10000) 2000 R ( 10000) 1333 ( 10000) 667 R R Notice that the allowable depreciation in this ethod is different for each year of the equipent life. Declining-balance ethod: This ethod is alsoan accelerated depreciation ethod that provides for larger portions of cost to be written off in the early years; this ethod nearly approxiates the actual loss in arket value with tie. Declining ethods range fro 1.25 ties the current book value divided by the life to 2.00 ties the current book value divided by the life (the latter is tered double declining balance). The estiated salvage value (S) is not included in the calculation, but the book value cannot go below the salvage value. 8

6 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent Following are the equations necessary for the use of the declining balance ethods: 1. Depreciation rate, R: For 1.25 declining balance (1.25DB)ethod, For 1.50 declining balance (1.50DB)ethod, For 1.75 declining balance (1.75DB)ethod, For double declining balance (DDB)ethod, R N (2-9) R N (2-10) R N (2-11) R 2 N (2-12) 2. The allowable depreciation D for any year and any rate R would be: D ( BV 1)R (2-13) 3. The book value for any year would be BV BV 1 D, BV S.. (2-14) Since (BV) can never go below (S), the declining balance ethod ust be forced to intersect the value (S) at tie (N). Exaple: A piece of equipent is available for purchase for ($12000), has an estiated useful life of (5 years), and an estiated salvage value of ($2000). Deterine the depreciation and the book value for each of the 5 years using the DDB ethod. Solution: 2 N BV Using Eq. (2-12); calculate R: R 0. 4 Using Eq. (2-13); calculate D : D 0 ( 1 ) Using Eq. (2-14); calculate BV : BV BV 1 Then tabulate the results as follows: D year D BV ( 12000) ( 7200) ( 4320) ( 2592)

7 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent Exaple: A piece of equipent costing ($10000) new, with a (5 years) useful life, and an expected salvage value of ($1000) is being considered for purchase. Calculate the yearly ownership costs using the three ethods of depreciation., Solution: 1. SL ethod: R D ( ) $ 1800 per year BV - 1($ D BV ) SOY ethod: Using Eq. (2-6): Using Eq. (2-5): N ( N + 1) 5( 5 + 1), or SOY SOY 2 2 N R SOY Using Eq. (2-7): D R ( P S) ( ), ( 9000) Then tabulate the results as follows: D year R D BV R / ( 9000) / ( 9000) /0.2 ( 9000) / ( 9000) 1200 R R R

8 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent 5 1/ ( 9000) DDB ethod: Using Eq. (2-12); calculate R: R N R BV Using Eq. (2-13); calculate D : D 0 ( 1 ) Using Eq. (2-14); calculate BV : BV BV 1 Then tabulate the results as follows: D year D BV ( 10000) ( 6000) ( 3600) ( 2160) ( 1296) < Investent Costs: Owning equipent costs oney, one part of ownership costs is Investent costs which include the following: The interest on the oney invested. Taxes of all types which are assessed against the equipent. Insurance. Storage. The rates for these costs vary aong different owners, with location and whether or not the equipent is actually used. The average annual cost of interest (I), is based on the average value of the equipent ( P ) during its useful life, which can be calculated based on straight-line depreciation as follows: P( N + 1) + S( N 1) P (2-) 2N Where: P total initial cost P average value N life in years S Salvage value 11

9 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent If there was no salvage value, then Eq. (1-) would be: P( N + 1) P (2-16) 2N For the purpose of illustration only, the following rates for investent costs will be used: Interest on borrowed oney, 12% Taxes, insurance and storage, 8% Operating costs: Maintenance cost Repair parts cost Lubrication and fuel Operating costs: Operating costs are those costs associated with the operation of a piece of equipent. Operating costs usually occur only when the equipent is being used; it includes: Maintenance and Repair Parts cost: The annual cost of aintenance and repairs ay be expressed as a percent of the annual cost of depreciation Lubrication and fuel. Fuel Consuption: When operating under standard conditions, a gasoline engine will consue approxiately (0.06 gal, 0.23 liter) per each flywheel horsepower hour, while a diesel engine will consue approxiately (0.04 gal, 0. liter)per each flywheel horsepower hour. Engines used in construction industry seldo operate at a constant output or at a rated output, except for short periods of tie, also, construction equipent is seldo operated the entire 60 in in an hour. Fuel consued per hour operating factor hp engine consuption (1-17) Lubricating Oil Consuption: The quantity of lubricating oil used by an engine will vary with the size, the capacity of the crankcase, the condition of the piston rings and the nuber of hours between oil changes. A forula ay be used to calculate the quantity of oilrequired as follows: 12

10 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent hp f ( kg / hp hr) C (1-18) 0.89( kg / l) t Quantity of oil consued (l/hr) Rated horsepower of the engine Operating factor Capacity of crankcase (gallon or liter) Nuber of hours between oil changes q + q hp f C t Exaples illustrating the cost of owning and operating construction equipent: Exaple-1: Deterine the probable cost per hour for owning and operating a (1.5 3 ) diesel engine crawler power shovel, the following inforation will apply: Cost of equipent $82260 Shipping cost $2448 Unloading &assebling at destination $220 Engine 160 hp Crankcase capacity liter Hours between oil changes 100 hr Operating factor 0.6 Useful life, with no salvage value 6 years Hours operated per year 2000 Weight kg Cost of fuel per liter 0.33 $/liter Cost of oil per liter 0.53 $/liter Maintenance 100% of Depreciation Investent 12% of Average Value Solution: Fuel consued per hour operating factor hp engine consuption Fuel consued per hour liter hp f q q ( kg / hp hr) ( kg / l) + C t liter Cost to owner: Cost of equipent Shipping cost 2448 Unloading &assebling at destination 220 Total Cost

11 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent Average value of the equipent Average value of the equipent ( ) Annual Costs: Depreciation: P D N 6 M 100%D I 12%P P( N + 1) 84928( 6 + 1) P 2N 2( 6) P Maintenance: ( ) 145 Investent: ( ) 5945 Total Annual Fixed Cost Hourly Costs: Fuel: 14.4( 0.33) 4.75 Lubrication Oil: 0.52( 0.53) 0.28 Total Cost per hour, excluding labor $22.16 Exaple-2: Deterine the probable cost per hour for owning and operating a (20 3 ) truck with six rubber tires, using the following inforation: Cost of Equipent $92623 Cost of tires $12113 Engine, Diesel 250 hp Crankcase capacity 53 liter Hours between oil changes 80 hr Operating factor 0.6 Useful life, with no salvage value 5 years Life if tires 5000 hrs Repairs to tires % of depreciation of tires Maintenance 50% of Depreciation Investent 20% of Average Value Hours operated per year 2000 Cost of fuel per liter 0.33 $/liter Cost of oil per liter 0.53 $/liter Solution: Because the tires have different life than the truck, they should be treated separately to calculate the depreciation of each. 14

12 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent Cost to owner: Cost of Equipent Cost of tires Net cost less tire P( N + 1) 92623( 5 + 1) average value of the equipent P N 2( 5) Annual Costs for truck: P D N 5 M 50%D I 20%P Depreciation: Maintenance: ( ) 8051 Investent: ( ) 111 Total Annual Fixed Cost $35268 Hourly Costs: Hourly ownership cost Fuel: ( 0.33) Lubrication Oil: ( 0.53) Tire depreciation: 5000 Tires repairs: Total Cost per hour, excluding labor $ Econoical Life of Construction Equipent: The owner of construction equipent should be interested in obtaining the lowest possible cost per unit of production. In order to accoplish this objective he ust follow an infored progra of equipent replaceent. When should equipent be replaced? If the owner replaces it too soon, he will experience an unnecessary capital loss, whereas, if he waits too long, the equipent will have passed its period of econoic operation. In order to deterine the ost econoical tie to replace equipent, accurate records of aintenance and repair costs and downtie ust be kept for each achine. The owner ust consider all costs related to the ownership and operation of the equipent, and the effect which continued use will have on these costs. The costs to be considered are: 1. Depreciation and replaceent. 2. Investent. 3. Maintenance and repairs.

13 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent 4. Downtie. 5. Obsolescence. An analysis of the effect which hours of usage will have on each of these costs will establish the tie at which a achine should be replaced Downtie Costs: Downtie is the tie that a achine is not working because it is undergoing repairs or adjustents. Downtie tends to increase with usage. Availability is a ter that indicates the portion of tie that a achine is available for production, expressed as a percent. For exaple, if a achine is down 5% of the tie, then its availability is 95%. Exaple: A achine's operation cost is (6 $/hr), has an average downtie of (5%), calculate the achine availability if it was used (2000 hr/year). Solution: The cost per hour for downtie ( $ / hr) The annual downtie cost for achine ( $ / year) Productivity of a achine: Productivity is a easure of the ability of equipent to produce at its original rate. If the productivity of a achine decreases with usage, the effect of this decrease is to increase the cost of production, which is equivalent to an increase in the cost per hour for continuing to use the equipent Obsolescence Costs: Iproveents in the productive capacities result in lower production costs. These iproveents, whose advantages can be gained only by the replaceent of older equipent with newer one, decrease the desirability of continuing to use the older equipent. For exaple, if a new achine will reduce production costs by 10%, when copared with production costs for an existing achine, the latter will suffer a loss in value equal to 10%. This is defined as an obsolescence loss. 16

14 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent 2.7. Sources of Construction Equipent: Contractors and other users of construction equipent are concerned with a decision as to whether to purchase or rent equipent. Under certain conditions it is financially advantageous to purchase, whereas under other conditions it is ore econoical and satisfactory to rent it. There are at least three ethods under which a contractor ay secure the use of construction equipent: 1. Purchase the equipent. 2. Rent the equipent. 3. Rent the equipent with an option to purchase it at a later date. The ethod selected should be the one that will provide the use of the equipent at the lowest total cost. Each of the three ethods has both advantages and disadvantages which should be considered prior to aking a decision. If the cost was the only factor to be considered, then an analysis of the cost under each ethod should give the answer. If other factors should be considered, they should be evaluated and applied to the cost as a basis on which to reach a decision. The correct decision for one contractor will not necessarily apply for another contractor. Advantages of purchasing equipent copared to renting it are: 1. It is ore econoical if the equipent is used sufficiently. 2. It is ore likely to be available for use when needed. 3. Because ownership should assure better aintenance and care, purchased equipent should be kept in better echanical condition. Disadvantages of owning equipentcopared to renting it are: 1. It ay be ore expensive than renting. 2. Purchasing ay require a substantial investent of oney or credit that ay be needed for other purposes. 3. The ownership of equipent ay influence a contractor to continue using obsolete equipent after superior equipent has been introduced. 4. The ownership of equipent designed priarily for a given type of work, ay induce a contractor to continue doing that type of work, whereas other work requiring different types of equipent ight be available at a higher profit. 17

15 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent 5. The ownership of equipent ight influence a contractor using the equipent beyond its econoic life, thereby increasing the cost of production unnecessarily. Once the decision is ade whether to purchase or rent, the next decision to be ade is whether to siply rent or rent with an option to purchase. The latter alternative will result in a higher rental cost as soe of the periodic rental charges will be applicable towards the purchase price of the equipent. This is an attractive alternative if the renter of the equipentbelieves he ay have enough use for the equipent to purchase it, but is not too sure that the utilization will be as high as predicted. This kind of rental agreeent results in higher hourly charges than straight rental agreeent. If the contractor intends to buy the equipent after renting it for a period of tie, then 90% of the rent charges will be discounted fro the total actual cost of the equipent. Exaple: A crawler bulldozer having the inforation shown below; the contractor intends to rent this equipent for 8 onths with an option to buy it later. Deterine the probable cost per hour for owning and operating this equipent. Actual cost $30500 Salvage cost $3000 Engine 160 hp Crankcase capacity 53 liter Hours between oil changes 80 hr Operating factor 0.6 Useful life 5 years Operating hours per year 2000 Cost of owning and operating the equipent in the case of purchasing it (excluding labor) 18.2 $/hr Rental period 8 onths Rental charges per onth $2651 Operating hours per onth 175 hr Maintenance (90% of Depreciation) Investent (13% of Average Value) Cost of fuel per liter 0.33 $/liter Cost of oil per liter 0.53 $/liter 18

16 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent Solution: Actual Cost $ Rent charges $ Discount on rent $ Reained cost $ Fro the above cost reained, it's obvious that the contractor can buy the equipent after 8 onths with less than 1/2 the price, and the equipent 8 still has a useful life tie equal to yr in addition to the 12 salvage value at the end of that useful life. The calculation of the probable cost per hour for owning and operating this equipent, for the reaining period of its useful life is as follows: Reaining cost $ Salvage cost $ 3000 Average cost 11413( ) 3000( ) P 2( 4.33) $ 5871 P S N Depreciation cost D $ 1943 Maintenance as if the equipent is new90% of depreciation %P Maintenance M 0.9 $ 4950 Investent I ( ) $ 763 Total fixed cost/yr $ Fixed cost/hr $ Fuel cost ( 0. 33) $ Lubrication oil cost + ( 0.53) $ 0.51 Total Cost per hour, excluding labor $ 9.09 So if the contractor buys the equipent after renting it for 8 onth, he will be able to resue using the equipent for the reaining of its useful life with acceptable and reasonable cost ( 9.09) $ / hr < ( 18.2) $ / hr [ ] 19

17 Construction Methods.. Ch.-2- Factors Affecting the Selection of Construction Equipent HW/ Exaple: Deterine the probable cost per hour for owning and operating a truck with rubber tires after renting it for 6 onth with an option to buy it later. Make use of the following inforation: Actual truck cost $50000 tires cost $10000 Engine 160 hp Crankcase capacity 60 liter Hours between oil changes 80 hr Operating factor 50% Useful life 6 years Operating hours per year 2000 Rental period 6 onths Rental charges per onth $2500 Tires useful life 5000 hr Maintenance for truck (60% of truck's Depreciation) Maintenance for tires (% of tires' Depreciation) Investent (12% of Average Value) Cost of fuel per liter 0.25 $/liter Cost of oil per liter 1.50 $/liter 20