1.1. Equipment cost – Caterpillar and Peurifoy method

In this lecture, we will be discussing how to estimate the total equipment cost. So far we have discussed how to estimate the ownership cost and the operating cost components. We will be working out some illustrations on how to estimate the total equipment cost using Caterpillar method and Peurifoy method, which are commonly adopted methods.

This chunk introduces the topic of the lecture, which focuses on estimating the total costs associated with equipment. Prior lectures have covered two main cost categories: ownership costs (costs incurred by the owner, such as depreciation and insurance) and operating costs (costs related to the operation, like fuel and maintenance). The Caterpillar and Peurifoy methods are two widely accepted approaches for calculating these costs, and illustrations will help clarify the application of these methods.

Imagine you're planning a construction project and need to rent machinery like excavators and bulldozers. You'd want to calculate not only how much it costs to rent (operating cost) but also the upfront costs of machines (ownership cost) over their useful life. This understanding is crucial for budgeting and financial planning.

The Caterpillar method includes estimating the ownership cost, starting with depreciation, which is calculated using the straight line method. The formula is:

Depreciation = (Initial price - Tire cost - Salvage value) / Depreciation period in hours.

The Caterpillar method starts with calculating ownership costs. Depreciation reflects how much value a piece of equipment loses over time. Using the straight line method simplifies this calculation by spreading the loss evenly across its useful life. The formula provided indicates that you begin with the initial price, subtract the tire cost (considered separately under operating costs), and then subtract the expected salvage value (the value of the equipment at the end of its useful life). This total is divided by the number of hours the equipment is expected to be used.

Think of buying a car: if you purchase it for $20,000 and expect to sell it for$2,000 after 10 years, your depreciation each year would be calculated based on this difference. The tires, however, would be replaced multiple times, and their cost isn’t considered in the car’s depreciation since you account for that separately.

Other components of the ownership cost include cost of investment, taxes, insurance, all calculated as a percentage of the average value of the equipment.

After determining depreciation, the overall ownership cost is influenced by other factors like investment cost, taxes, and insurance. These costs typically depend on the average value of the equipment over its useful life, which can be calculated using a derived formula from earlier lessons. These costs are important as they add to the total expenditure on the equipment that isn’t reflected in the straightforward purchase price.

Consider owning a house: beyond just the mortgage, you pay property taxes and homeowner’s insurance every year, representing your ongoing ownership costs. Similarly, with a piece of equipment, taxes and insurance accumulate over time, impacting your budget.

Now moving to operating costs, we will first discuss the fuel cost related to equipment operation, which is derived from fuel consumption factors.

With ownership costs calculated, the next area of focus is operating costs. Operating costs include any expenses incurred while using the equipment; among the primary expenses is fuel. Fuel consumption factors vary depending on usage and equipment type. Reliable data can be referenced from handbooks or manufacturer guidelines to ensure accurate estimates.

When renting a car, you often consider fuel efficiency rates to estimate how much you'll spend on gas during your trip. Similarly, for construction equipment, understanding the fuel consumption is essential for budgeting operational costs over the duration of use.

Fuel costs can be determined by the formula:

Fuel cost = Fuel consumption factor * Rated power * Unit fuel cost.

Fuel costs constitute a significant portion of operational expenses. To calculate these costs accurately, one needs to consider the equipment's fuel consumption efficiency (the fuel consumption factor), its rated power (how much power the engine produces), and the current price of fuel (unit fuel cost). This systematic approach aids in estimating how much fuel will be needed and its corresponding cost during project execution.

Think of it like filling up a vehicle for a long road trip. You’d calculate how far you go based on your car’s mileage (fuel consumption) and the distance traveled, along with the current gas prices, to estimate how much you will spend on fuel before starting your journey.

Consumables like filter, oil, and grease are also part of operating costs. These can be expressed in hourly terms or as a percentage of the fuel cost based on guidelines from handbooks.

Consumables are supplies used up during equipment operation, which can include oil, grease, and filters. Their costs also play a crucial role in the overall operational budget. Some handbooks provide factors or percentages that can simplify these calculations, adjusting based on regional labor costs and skills, which is crucial as they can vary significantly from one location to another.

Imagine running a café: along with the costs of goods sold (the food and beverages), you have recurring expenses like cleaning supplies, napkins, and sugar. Just like consumable costs in construction, these are necessary expenses that, if overlooked, can seriously impact profitability.

Tire costs are estimated based on their replacement life in hours obtained from manufacturer guidelines.

The financial impact of tires must also be accounted for as they have a limited lifespan and can vary based on the operating conditions. Manufacturers often provide expected tire lives under various scenarios, allowing you to calculate costs effectively. This calculation not only includes the cost of tires but may also add repair costs to fully reflect what is spent.

If you own a bicycle and often ride on rough terrain, you'll notice that your tires wear out more quickly than if you'd only cycled on smooth pavement. Similarly, in construction, different working conditions will affect how quickly the tires on machinery wear out and need replacement.

Finally, the total ownership and operating cost is the sum of all these components, including wages for operators.

To get a complete picture of equipment costs, all ownership and operating cost components need to be added together. This aggregate total gives project managers the necessary clarity on budget requirements for equipment. Operator wages, bonuses, and any benefits should also be included, reflecting the entire cost associated with utilizing the machinery effectively.

Similar to creating a budget for a household, where you add up fixed costs (like rent or mortgage) and variable costs (like groceries and utilities), breaking down and summing these equipment costs ensures that all financial responsibilities are clear and manageable.

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