3.2.3. Repair and Maintenance

Try these first

1. 1.

   What is the formula for calculating depreciation using the straight-line method?

   Hint

   Think about how we define the useful life of equipment.

2. 2.

   Name two components of ownership cost.

   Hint

   Consider what costs are involved in owning equipment.

3. 3.

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

   • Estimate depreciation
   • Calculate operating costs
   • Determine salvage value

   Hint

   Remember, ownership costs start with ownership!

4. 4.

   True or False: Operating costs can include estimates for fuel, maintenance, and labor.

   • True
   • False

   Hint

   Think about the definition of operating costs here.

5. 5.

   Calculate the total ownership cost of a piece of heavy equipment, given the initial cost is $100,000, a salvage value of$20,000, a depreciation time of 10,000 hours, and additional costs of taxes at 5% and insurance at 2%. Provide a detailed breakdown of your calculations.

   Hint

   Break down your calculations step by step by first determining each individual cost component.

6. 6.

   Using the Peurifoy method, analyze how cash flows are transformed into equivalent annual costs for a piece of equipment valued at $85,000 with a salvage value of$15,000 over 5 years and a 10% interest rate. Show your formulae and key calculations.

   Hint

   Make sure to define your interest rate and understand the use of both recovery and sinking fund factors in this context.