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Equipment Costs

Equipment Costs. Part 6.3 Follows Halpin Chapter 9 November 6, 2002. 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. Purpose. Equipment Costs are an important part of project cash flow.

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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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