2.1. Ownership Cost

Try these first

1. 1.

   Define ownership cost and list its components.

   Hint

   Think about what costs are associated with simply owning the equipment.

2. 2.

   What is the Caterpillar method primarily used for?

   Hint

   Consider which costs it simplifies in its calculations.

3. 3.

   What is the first step in estimating ownership costs using the Caterpillar method?

   • Calculating insurance
   • Estimating depreciation
   • Finding the average value

   Hint

   Remember, it's about the costs associated with ownership.

4. 4.

   True or False: The Peurifoy method does not consider the timing of cash flows.

   • True
   • False

   Hint

   Think about what this method emphasizes.

5. 5.

   A company owns several pieces of construction equipment. Calculate the total ownership costs, given a total initial cost of $500,000 with a salvage value of$30,000 over 15 years. Consider that the average insurance expense is 2% of initial cost and taxes are 1.5%. Include these in your calculations.

   Hint

   Don't forget to include all costs equally when summing up!

6. 6.

   A construction project requires an estimation of costs using both Caterpillar and Peurifoy methods on a piece of equipment that costs $200,000 with an expected salvage value of$20,000 over a usage period of 10 years. Discuss discrepancies in annual costs calculated between both methods and their implications.

   Hint

   Utilize the cash factor importance relative to time valuation.