CONSTRUCTION EQUIPMENT MANAGEMENT

Prepared By :

Prof. Chintan S. RaichuraCivil Engineering DepartmentDIET, Rajkot

❖Advanced Concept in Economic Analysis :

➢Engineering economic analysis is a science of applying economic

criteria to select the best out of a set of alternate engineering design

or proposals.

➢ It provides the procedure for the cost analysis of project alternatives

for the purpose of finding the best cost or the most economical

alternatives of the project.

➢Advanced method of economic analysis are :

1) Sensitivity analysis

2) Breakeven analysis

❖ Sensitivity Analysis :

➢ While comparing alternatives assumptions are made in regards to

various variables such as initial cost, receipts, disbursements,

interest rate, life of assets, salvage value, etc. in previous study.

➢ We assume that value of this variables were accurate and constant.

➢ However, in real life situations value of such variables are likely to

change in most of the occasions.

For Example :

▪ The Life of the assets can be longer or shorter than our

estimate.

▪ The rate of interest may be higher or lower then the assumed

value.

➢The changes in the variable value may or may not lead to reversal of

our earlier decision.

➢ If even a slight change in one variable leads to a reversal of decision

– from say acceptance of one alternative to its rejection – we say

that the variable is highly sensitive.

➢ In contrast with that, even if a large change in variable does not

change the decision we say that the variable is insensitive.

➢Sensitivity analysis categorize variables in highly sensitive, less

sensitive, and insensitive variable categories.

➢By this classification we can focus on highly sensitive variables for

batter management of project.

➢ It is a non probabilistic technique.

❖Different forms of sensitivity analysis :

Sensitivity analysis

Single alternative

Change in one variable at a time

Change in two variable at a time

Change in more than two variable

at a time

More than one alternative

Change in one variable at a time

Change in two variable at a time

Change in more than two variable

at a time

Spider web diagram

Family of curves or isoquants

Scenario analysis

➢Sensitivity analysis can be performed with any method of

evaluation of alternatives such as present worth analysis, annual

cost and worth analysis or internal rate of return method of

analysis.

➢ It can be performed at different stage of project such as pre-tax

cash flow or post-tax cash flow. However it is preferable to

perform with post tax cash flow.

➢Sensitivity analysis results are shown in the form of graphs.

❖Sensitivity Graph

➢The value of incomings at which the net present worth is zero is

known as breakeven point.

➢The slope of the sensitivity line indicates the sensitivity of a

particular variable.

➢The steeper the slope, the more sensitive the variable is, and vice

versa.

➢We can see from the graph that variables such as incomings and

interest rates are highly sensitive variables whereas outgoings and

salvage value are less sensitive.

➢We can also take two variables at same time in sensitive study.

➢For two variables we can show results in following methods :

1) Family of curves

2) Isoquants

❖Family of curves :

➢ In this method one variable is fixed while another variable is

varied.

➢For example service life(N) is fixed and net present worth(NPW)

is computed for different values of incomings R.

❖Isoquants :

➢ In this method an indifference line is plotted by varying two

different variables, say service life (N) and incomings (R).

➢For plotting indifference line, points (N1 R1), (N2 R2) are plotted

such that at this point net present worth is zero.

➢The indifference line separates acceptance zone and rejection zone.

❖Scenario analysis :

➢For involving more than two variables at a time in sensitivity

analysis, scenario analysis is most suitable method.

➢ In scenario analysis following scenarios are generated :

▪ Best scenario

▪ Normal scenario

▪ Worst scenario

➢ The objective of this method is to get feel of what happens under

the most favorable and the most adverse configurations of key

variables.

➢ Corresponding to all this scenario NPW is calculated for ease of

taking batter decision.

➢Scenario analysis is superior method than sensitivity analysis

because it considers more than two variables at same time.

➢However it has following limitations :

i) It assumes that there are a few well delineated scenarios, which

may not be true in many cases.

ii) There is a huge requirement of data to perform scenario

analysis.

❖Breakeven Analysis :

➢ In this method more emphasis is given on finding breakeven

point at which reversal of decision takes place.

➢ In other words to know the minimum returns of equipment or

minimum amount of production required to recover money

invested is called breakeven analysis.

➢ The minimum quantity at which loss is avoided is called break

even point.

➢ The break even analysis is also called cost-volume profit

analysis.

➢Selection of lifting equipment according to breakeven analysis.

Hand Hoist Mechanical Hoist

➢Total cost versus number of components lifted are plotted for

both of this equipment.

➢Two lines meeting at a point is called breakeven point.

Cost versus No. of components graph for hand hoist and

mechanical hoist

❖Assumptions of breakeven analysis :

1. All cost and volumes are known.

2. Cost-volume relationship are linear.

3. All output can be sold.

❖ Advantages of breakeven analysis :

1. It is simple and easy to visualize.

2. It focuses on profitability

3. It uses both algebraic and graphical display

❖ Limitations of breakeven analysis :

1. Charts are only true within limits they are based on.

2. Indirect cost may change at different levels of output.

3. Variables may not give a straight line chart.

4. Total revenue curve may band due to discounts.

5. Managerial decisions may alter the direct and indirect cost.

“it would be well if engineering were less generally thought of,

and even defined, as the art of constructing. In certain important

sense it is rather the art of not constructing; or, to define it rudely

but not ineptly, it is the are of doing that well with one dollar which

any bungler can do with two….”

- By Wellington