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Equipment Costs

Learn about the significant impact of equipment costs on project cash flow, including fixed ownership costs, variable operating costs, depreciation methods, and economic life calculations. Gain insights on choosing the right ownership model, managing overhead and profit, and optimizing balance sheets for project success. Explore the concept of ownership costs, operation and maintenance expenses, and the importance of profit margins in project budgets.

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Equipment Costs

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  1. Equipment Costs Part 6.3 Follows Halpin Chapter 9 November 6, 2002 CVEN349-Maxwell

  2. 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. CVEN349-Maxwell

  3. 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. CVEN349-Maxwell

  4. 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. CVEN349-Maxwell

  5. 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 CVEN349-Maxwell

  6. 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. CVEN349-Maxwell

  7. 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 CVEN349-Maxwell

  8. O&M or Variable Costs (Varies with the amount of use.) • Fuel • Maintenance • Repairs • Deterioration or “Wear-Out” based on use CVEN349-Maxwell

  9. Overhead & Profit Profit and Loss Center Concept • Overhead • Project Overhead • P&L Center Overhead • Profit • Job Profit • P&L Center Profit CVEN349-Maxwell

  10. 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: CVEN349-Maxwell

  11. Resulting Cash Stream (Ignore the effect of interest) CVEN349-Maxwell

  12. Plot of Cash Stream The Economic Life is the year where the overall cost is the least CVEN349-Maxwell

  13. 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. CVEN349-Maxwell

  14. 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” CVEN349-Maxwell

  15. Production Rate Method • Based upon yearly fraction of estimated life time production = 6,000 hrs • Initial Cost = $12,000, Salvage Value = 0 CVEN349-Maxwell

  16. Straight Line • Initial Cost = $12,000, Salvage Value = $3,000, Years = 3. CVEN349-Maxwell

  17. 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. CVEN349-Maxwell

  18. 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. CVEN349-Maxwell

  19. Class Assessment • Take a minute to write down the muddiest topic and turn it in. CVEN349-Maxwell

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