CONSTRUCTION

ECONOMICS

Time Value of Money

The amount of money left in a saving account for a
period of time may be calculated by using the equation
of:
F=(1+i)n

Where F= value at the end of n periods (future value)

P= Present value
i= interest rate per period
n = number of periods
Often (1+i)n is called the single-payment compound
interest factor.

The present value of some future amount

can be calculates as:
F
P =
(1 + i) n
1
(1 + i) n

The expression
is called as singlepayment present worth factor.

Equipment Cost
Elements of Equipment Cost
To tender it is necessary to know the
cost of a unit production (money/m3
excavation, Money/m2 of top soil
stripping, etc.)

To find the cost of operating of an equipment,

it is essential to estimate many factors, such
as, fuel consumption, tire life, and so on. The
best basis for estimating such factors is to
use the historical data (=records). If this data
is not available, the equipment manufacturer
can be consulted.

Equipment Cost Cont..

Owning and operating cost (O & O
costs) are composed of owning costs
and operating costs.
Owning Costs are fixed costs that are
incurred each year whether the
equipments is operated or not.
Operating Costs are incurred only when
the equipment is used.

Owning Costs
Owning cost is made up by;
- Depreciation
- Investment (interest) cost
- Insurance cost
- Taxes
- Storage cost

Depreciation Costs
Depreciation represents the decline in market value of an item of
equipment due to age, wear, deterioration, and obsolescence.
Depreciation is used for two purposes.
- Evaluating tax liability.
- Obtaining depreciation component of hourly equipment costs.

For tax liability many contractors prefer to depreciate the equipment

as rapidly as possible to obtain the maximum reduction in tax liability
during the first few years of equipment life.
For rubber-tired equipment, the value of tires should be subtracted
from the amount to be depreciated because tire cost will be
computed separately as an element of operating cost.

Depreciation Costs Cont.

Equipment salvage value should be estimated as
realistically as possible based on historical data.
Equipment economical life should also be determined.
For many construction equipment, the economical life
time is accepted to be 5 years.
The common depreciation methods are:
- Straight line method
- Sum of the years digits method
- Double declining balance method

Straight Line Method

Straight line method produces a uniform
depreciation for each year of equipment life.
The amount to be depreciated annually is
equipment's initial cost less salvage value (and
less tire cost for rubber-tired equipment).
Cost - Salvage - (tires)
Dn =
N

Where: N= equipment life (years)

n = year of life (1, 2, 3 etc.)
D= Depreciation value

Example

Using the straight-line method of

depreciation,
find
the
annual
depreciation and book value at the end
of each year for a track loader having an
initial cost of $50000, a salvage value of
$5000, and expected life of 5 years.

Solution
50000 - 5000
D1,2,3,4,5 =
= $9000
5

Year
0
1
2
3
4
5

Depreciation
($)
0
9000
9000
9000
9000
9000

Book Value ($)

(End of Period)
50000
41000
32000
23000
14000
5000

Sum-of-the-Years-Digits Method

The sum of the years digits method of

depreciation
produces
a
non-uniform
depreciation which is the highest in the first
year of life and gradually decreases thereafter.
The amount to be depreciated is the same as
that used in the straight-line method. The
depreciation for a particular year is calculated
by multiplying the amount to be depreciated by
a depreciation factor.
Dn

Year digit
Amount to be depreciated
Sum of years' digits

Example

For the loader of Example 3.1, find the

annual depreciation and book value at
the end of each year using the sum-ofthe-years'-digits method.

Solution

Using above equation

D1

5
(50000- 5000) = 15000
(1 2 3 4 5)

D2

4
(50000- 5000) = 12000
15

D3

3
(50000- 5000) = 9000
15

D4

2
(50000- 5000) = 6000
15

1
D5
(50000- 5000) = 3000
15

Year

Depreciation
($)

Book Value ($)

(End of Period)

50000

15000

35000

12000

23000

9000

14000

6000

8000

3000

5000

Double-Declining-Balance Method
This
method
produces
its
maximum
depreciation in the first year of life. The
depreciation for a particular year is found by
multiplying a depreciation factor by the
equipment's book value at the beginning of the
year. The annual depreciation factor is found
by dividing 2 by the equipment life in years.
Care must be taken not to reduce the book
value below the salvage value of the
equipment.
2
Dn Book value at the beginning of year
N

Example
For the loader of example 3.1, find the
annual depreciation and book value at
the end of each year using the doubledeclining-balance method.

Solution
Annual depreciation factor =

2
= 0.4
5

D1 0.4 50000 = 20000

D2 0.4 30000 = 12000

D3 0.4 18000 = 7200

D4 0.4 10000 = 4320
D5 0.4 6480 = 2592 use $1480*

Year

Depreciation ($)

Book Value ($) (End

of Period)

50000

20000

30000

12000

18000

7200

10800

4320

6480

1480

5000

* Because a depreciation of $2592 in the fifth year would reduce the book
value to less than $5000, only $1480 ($6480-5000) may be taken as
depreciation.

Investment Cost
Investment cost represents the annual cost of
the capital invested in a machine. It is simply
the interest charge on these funds. Investment
cost is computed by multiplying the interest
rate by the value of the equipment. For a
specific year investment cost is calculated by
using the book value of the equipment in that
year.
However, the simple way to find it is:
Initial cost + Salvage value
Average investment =
2

Insurance, Tax and Storage

Insurance cost represents the cost of fire, theft,

accident, and liability insurance for the equipment.

Tax cost represents the cost of property tax and

licenses for the equipment

Storage cost represents the cost of storage yard,

wages of guards and employees involved in handling
equipment in and out of storage yard and associated
direct overhead.

Owning Cost
Owning cost is computed as the sum of depreciation,
investment, insurance, tax and storage costs.

Operating Costs
Operating costs are incurred only when
equipment is operated.
-

Fuel cost
Service cost
Repair cost
Tire cost
Cost of special items
Operators' wages

Fuel Cost

The hourly cost of fuel is the multiplication of

hourly consumption and the cost of fuel per
unit of fuel. If fuel consumption historical data
is not available, the manufacturer's data or
Table 1.1 can be used.

Load Conditions *
Type of Equipment
Low

Average

Severe

Clamshell and dragline

0.024

0.030

0.036

Self propelled Compactors

0.038

0.052

0.060

Crane

0.018

0.024

0.060

Excavator Hoe or Shovel

0.035

0.040

0048

Loader - Track

0.030

0.042

0.051

Loader Wheel

0.024

0.036

0.047

Motor Grader

0.025

0.035

0.047

Scraper

0.026

0.035

0.044

Tractor Crawler

0.028

0.037

0.046

Tractor Wheel

0.028

0.038

0.052

Wagon

0.029

0.037

0.046

*: Low, light, or considerable idling; average, normal load and operating

conditions; severe, heavy work, little idling.

Service Cost
Service cost represents
the cost of oil, hydraulic
fluids, grease, and
filters as well as the
labour required to
perform routine
maintenance service.
The manufacturers
data or Table 1.2 can
be used.

Operating
Conditions

Service Cost
Factor

Favourable

20

Average

33

Severe

50

Repair Cost
Repair cost represents all repair and maintenance cost except for tire
repair or replacement, routine services, and replacement of highwear items such as ripper teeth. It is the largest item of operating
expenses.
Lifetime repair is estimated as a percentage of initial cost. See Table
3.2.
However repair cost is lower in the first year than the last years.
Therefore, for an accurate estimate during a year the following
equation is used.

Year digit
Lifetime repair cost
Hourly repair cost =

Sum - of - years - digits

Hours operated

Working Conditions
Type of Equipment
Favourable

Average

Severe

Clamshell and dragline

40

60

80

Crane

40

50

60

Excavator, hoe or shovel

50

70

90

Loader Track

85

90

105

Wheel

50

60

75

Motor grader

45

50

55

Scraper

85

90

105

Crawler tractor

85

90

95

Wheel

50

60

75

Track, off-highway

70

80

90

wagon

45

50

55

Example

Estimate the hourly repair cost for the

first year of operation of a crawler tractor
costing $136000 and having a 5-year
life. Assume average operating
conditions and 2000 hours of operation
during the year.

Solution
Lifetime repair cost factor = 0.90 (Table 3.2)
Lifetime repair cost = 0.90 $136000= $122400

Hourly repair cost

1
122400

$4.08
15
2000

Tire Cost

Tire cost represents the cost of tire and

replacement. Table 3.4 may be used to
approximate tire life if the data is not
available. For replacement of tire, a 15%
of repair cost is to be added.
Cost of a set of tire ($)
Tire cost = 1.15
Expected tire life

Operating Conditions

Type of Equipment
Favourable

Average

Severe

Dozers and Loaders

3200

2100

1300

Motor Graders

5000

3200

1900

Conventional Scrapers

4600

3300

2500

Twin-engine Scrapers

4000

3000

2300

Push-pull and elevating Scrapers

3600

2700

2100

Trucks and Wagons

3500

2100

1100

Operating Costs (cont.)

Special Items
It includes the cost of replacing high-wear items such as
dozer, grader, and scraper blade cutting edges and end
bits, ripper tips, shanks etc. The unit cost is calculated by
dividing expected cost in lifetime by working hours in a
life time.

Operator Cost
It include the operator's wages. Wages should include all
insurances, social security, taxes, overtime etc.
Total Owning and Operating Costs
Total owning and operating cost is used for tendering
purposes. However, it does not include overhead and
profit.

Example
Calculate the expected hourly owning and operating cost for the
second year of the operation of the twin-engine scraper described
below.
Cost delivered=$152,000
Tire cost=$12,000
Estimated life=5 years (2000 hours operation per year)
Salvage value=$16,000
Depreciation method=sum-of-the-years-digits
Investment (interest) rate=10%
Tax, insurance, and storage rate=8%
Operating conditions=average
Rated power=465 hp
Fuel price=$0.40/gal
Operator's wages=$8.00/h

Solution

Owning Cost
Depreciation cost:

4
D2 = (152000 16000 12000) = $33,067
15
33067
Depreciation =
= $16.53/hr
2000

Investment, tax, insurance, and

storage cost

Cost rate = Investment + tax, insurance, and

storage= 10+8= 18%

152000 + 16000
Average investment =
= $84000
2

84000 0.18
Investment, tax, insurance, and storage =
= $7.56 / hr
2000

Total owning cost = 16.53+ 7.56 = $24.09/hr

Operating cost

Fuel cost:

Estimated consumption = 0.035 465 = 16.3 gal/hr

Fuel cost =16.3 0.40 = $6.52 / hr

Service Cost:

Service cost = 0.33 6.52 = $2.15/ hr

Repair cost:

Lifetime repair cost = 0.90 (152000 - 12000) = $126000

2
126000
Repair cost =

= $8.40 / hr
15
2000

Tire cost:
Estimated tire life: 3000 hrs

$12000
Tire cost = 1.15
= $4.60 / hr
3000

Operators wages = $ 8.00/hr

Total opearting cost = 6.52 + 2.15 + 8.40 + 4.60 + 8.00 = $29.67 / hr

Total O & O Cost:

Owning and operating cost = 24.09 + 29.67 = $ 53.76/hr

Calculate the expected hourly owning cost for a third year of

operation of a wheel mounted loader with 465 hp. For the third
year the loader is scheduled to work at different sites for 5 days a
week and 8 hours a day and it remains idle for 28 days in the
third year for maintenance, servicing and holidays.
. Initial cost of loader = $265,000
. Estimated salvage value = $20,000
. Tax cost for third year = $5000
. Insurance cost for third year = 1250
. Storage cost for third year = 1500
. Estimated depreciation for third year = $25,000

The contractor borrowed money from bank to buy the loader and
he pays back his loan on equal instalment of $50,000 per year.
The bank rate for borrowed capital is 12% per year.

Calculate the expected hourly owning cost for a second year of operation
of wheel mounted hydraulic shovel. For the second year the shovel is
scheduled to work at different sites for 6 days a week and 9 hours a day.
Initial cost = 175,000
Tax for second year = 4200
Storage cost for 2nd year = 1200
Estimated equipment life = 7 years
Tire cost = $10,000
Estimated salvage value = 16,000
Insurance cost for 2nd year = 1100
Depreciation method = sum of the years digits
The contractor borrows money from bank to buy the shovel and he pays
back his loan on equal instalment of 40,000 per year. The bank rate for
borrowed capital is 15% per year.