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Equipment Costs

Part 6.3Follows Halpin Chapter 9

November 6, 2002

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RAT #06-03-1 Take out a sheet of paper, put your

name on it, … … Take 1-minute to list the 4 classes

of procurement costs. Pass to the aisle, etc.

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Purpose Equipment Costs are an important

part of project cash flow. Equipment Costs consists of : Fixed

Ownership Cost and Variable Operating Costs

Depreciation is a major component of fixed costs and has a significant affect on project cash flow.

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Learning Objectives Be able to find the economic life of

an asset. Be able to identify various cost

components Be able to compute depreciation

by the St-line or Production Rate Method.

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General Concept The right Equipment is required for

efficient operation – get the job done.

The right Ownership Model is required for efficient cash-flow – be able to make some money.

The right Ownership Model is required for the optimum balance sheet – be able to borrow money

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General Types of Costs Ownership -- Fixed Costs Operation & Maintenance -- Variable

Costs Overhead Costs – G&A Profit – Why is this a cost to the job?

Let’s look at in detail.

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Ownership or Fixed Costs (Independent of amount of Use.)

Debt Service – Interest, etc. Insurance – PD, PL, Other Depreciation & Federal Income

Taxes – More about this later Taxes – Local Taxes

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O&M or Variable Costs (Varies with the amount of use.)

Fuel Maintenance Repairs Deterioration or “Wear-Out” based

on use

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Overhead & Profit

Profit and Loss Center Concept Overhead

Project Overhead P&L Center Overhead

Profit Job Profit P&L Center Profit

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Economic Life Of Equipment

Assume that a bulldozer costs $400k Assume that its O&M costs are $30k

for the first year and increase $30k per year

Then the cash stream looks like this:

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Resulting Cash Stream (Ignore the effect of interest)

EOY Ave Cost/yr O&M/yr Total

1 $400 $30 $430

2 $200 $60 $260

3 $133 $90 $223

4 $100 $120 $220

5 $80 $150 $230

6 $67 $180 $247

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Plot of Cash StreamEconomic Life of Equipment

0

50

100

150

200

250

300

350

400

450

500

1 2 3 4 5 6 7 8 9 10

Time in Years

Co

st

of

Do

zer

The Economic Life is the year where the overall cost is the least

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PAT #6.3.2 Take out a piece of paper, write your

name and team, and … … Assume a tower crane costing

$1-million with a 1-st year O&M cost of $100k. If the O&M costs increase by $50k/yr thereafter, what is the economic life of the crane?

You have 5-minutes to turn in your paper.

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Depreciation Costs These are intangible costs – that is, non out-of-

pocket. Don’t confuse with “wear-out.” Methods are dictated by the IRS but you have

some flexibility in your choice – It’s up to you to pick the best one for your circumstances.

What might those be? Class Discussion. Straight Line – Conservative Declining Balance, etc – Accelerated ACRS/MACRS – Generally the case now. Actually DDB

with conversion to St-Line. Production – Most unusual: Actually has something to

do with “wear out”

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Production Rate Method Based upon yearly fraction of estimated life

time production = 6,000 hrs Initial Cost = $12,000, Salvage Value = 0

Year Hours Book Value Depreciation

0 -6,000 $12,000 $0

1 3000 $6,000 $6,000

2 1000 $4,000 $2,0003 2000 $0 $4,000

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Straight Line Initial Cost = $12,000, Salvage Value =

$3,000, Years = 3.

Year Book ValueDepreciation

0 $12,000 $0

1 $9,000 $3,000

2 $6,000 $3,000

3 $3,000 $3,000

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PAT #6.3.3 Take out a sheet of paper, write your

name … … What is the annual St-Line

depreciation amount for a tower crane costing $1-million, with a service life of 8-years, and an estimated salvage value of $200k? Take 2-minutes.

Pass your paper to the aisle and to the front.

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Summary Equipment Costs are an important

part of project cash flow. Equipment Costs consists of : Fixed

Ownership Cost and Variable Operating Costs

Depreciation is a major component of fixed costs and has a significant affect on project cash flow.

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Class Assessment Take a minute to write down the

muddiest topic and turn it in.