3/21/2003CVEN349-Maxwell1 Equipment Costs Part 6.3 Follows Halpin Chapter 9 November 6, 2002

3/21/2003CVEN349-Maxwell2 RAT # 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.

3/21/2003CVEN349-Maxwell3 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.

3/21/2003CVEN349-Maxwell4 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.

3/21/2003CVEN349-Maxwell5 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

3/21/2003CVEN349-Maxwell6 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.

3/21/2003CVEN349-Maxwell7 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

3/21/2003CVEN349-Maxwell8 O&M or Variable Costs (Varies with the amount of use.) Fuel Maintenance Repairs Deterioration or “Wear-Out” based on use

3/21/2003CVEN349-Maxwell9 Overhead & Profit Profit and Loss Center Concept Overhead Project Overhead P&L Center Overhead Profit Job Profit P&L Center Profit

3/21/2003CVEN349-Maxwell10 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:

3/21/2003CVEN349-Maxwell11 Resulting Cash Stream (Ignore the effect of interest) EOYAve Cost/yrO&M/yrTotal 1$400$30$430 2$200$60$260 3$133$90$223 4$100$120$220 5$80$150$230 6$67$180$247

3/21/2003CVEN349-Maxwell12 Plot of Cash Stream The Economic Life is the year where the overall cost is the least

3/21/2003CVEN349-Maxwell13 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.

3/21/2003CVEN349-Maxwell14 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”

3/21/2003CVEN349-Maxwell15 Production Rate Method Based upon yearly fraction of estimated life time production = 6,000 hrs Initial Cost = $12,000, Salvage Value = 0

3/21/2003CVEN349-Maxwell16 Straight Line Initial Cost = $12,000, Salvage Value = $3,000, Years = 3.

3/21/2003CVEN349-Maxwell17 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.

3/21/2003CVEN349-Maxwell18 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.

3/21/2003CVEN349-Maxwell19 Class Assessment Take a minute to write down the muddiest topic and turn it in.