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Interactive Audio Lesson
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Estimation of Ownership Costs
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Today we're discussing how to estimate the ownership costs of a dump truck. Can anyone tell me what factors might be included in ownership costs?
I think it includes depreciation, interest, insurance, and taxes.
That's right! We must account for depreciation, which is calculated by taking the initial purchase price minus the tire cost over its useful life. For our truck, with an initial cost of 3 crores and a tire cost of 11 lakhs, if its useful life is 12.5 years, can someone help me calculate the annual depreciation?
Sure! It would be (3 crores - 11 lakhs) / 12.5 years.
Exactly! This gives us the breakdown needed for ownership calculations. Remember, depreciation is vital as it reflects the cost of using our asset over time. Let's memorize this formula: 'Initial Cost - Tire Cost = Depreciable Base'.
Operating Costs Calculation
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Moving on to operating costs. What do you think influences these costs for our dump truck?
It's mostly fuel and labor costs, right?
Exactly! Fuel consumption is calculated based on the machinery's horsepower and fuel cost per liter. If our truck consumes 0.09 liters per horsepower and operates at 250 horsepower, how would we find the hourly fuel cost?
We'd multiply 0.09 by 250 and then by the fuel cost, which is 65 rupees per liter!
Correct! The equation helps us understand the operating expense directly impacting project budgeting. And let's remember the acronym FUEL: 'Fuel Usage Equals Labor'.
Total Cost Calculation
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Now that we have ownership and operating costs estimated, how do we find the total equipment cost?
Is it a simple addition of ownership and operating costs along with wages for the operator?
Exactly! If our hourly ownership cost is 2713 rupees and the operating cost is 3209.29, along with operator wages of 200 rupees, what's our total cost?
That would be 2713 + 3209.29 + 200 which gives us 6122.29 rupees per hour.
Great job! This calculation is essential to ensure we stay within budget and determine project feasibility.
Peurifoy Approach
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Lastly, let's look at the Peurifoy approach for estimating our costs. What does this method do differently from what we've learned?
I think it considers the timing of cash flows?
Exactly! It uses a time value approach, which can provide a more accurate estimate by applying a discount rate. Can someone explain why this might be important?
It helps in understanding the present value of future costs, making it easier to budget correctly.
Yes! Remember the phrase ‘Time is Money’ so you understand how time affects our investment costs.
Introduction & Overview
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Quick Overview
Standard
In this section, the process of calculating ownership and operating costs for a dump truck is detailed through outlined methodologies and examples. Key concepts such as annual usage, depreciation, and various cost factors are demonstrated using practical figures.
Detailed
Annual Use and Hourly Usage Discussion
This section details the methodologies for estimating both ownership and operating costs of heavy machinery like dump trucks. Specific examples are provided, including:
- Ownership Costs: Comprised of depreciation, interest, insurance, and taxes based on the initial purchase price minus tire cost, along with their corresponding percentages.
- Operating Costs: Encompassing fuel, filter oil and grease, tire costs, and repair costs, each rooted in operational data collected from machinery handbooks or approximations for accurate calculations.
Using a detailed example of a dump truck purchased for 3 crores with various cost components such as an interest rate of 8%, insurance of 2%, and taxes of 3%, total costs are computed based on its annual usage of 1600 hours. The methodology follows a structured approach that allows estimation through two methods: the Caterpillar method and the Peurifoy approach, enabling students to grasp not just the numbers but the underlying rationale and calculation processes. This emphasizes the importance of accurate data and adjustments according to conditions to effectively manage equipment costs in real-world scenarios.
Audio Book
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Estimating Total Costs
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So just add up everything the ownership cost, all the operating cost, and operating wages also you will get the total ownership and the operating cost following the Peurifoy guidelines.
Detailed Explanation
To estimate the total cost related to a piece of equipment, it is essential to combine all relevant expenses. This includes the ownership cost, which is associated with the purchase and upkeep of the equipment, and the operating costs that cover fuel, maintenance, and wages for operators. By following the Peurifoy guidelines, one can systematically estimate these costs to develop a comprehensive understanding of equipment expenses.
Examples & Analogies
Imagine you're running a food stall. To understand your total costs, you would not only consider what you pay for ingredients (like ownership costs) but also what you spend on utilities, staff salaries, and packaging (like operating costs). Just like in the food stall, where you need to consider all expenses to determine your pricing, in equipment management, all costs need to be aggregated for accurate budgeting.
Understanding Off-Highway Trucks
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So you can see this problem in this problem you can estimate the cost for the dump truck. It is off highway truck, why we call it as off highway? This truck is not permitted on the public highways. It is a heavy equipment high-end equipment you can see that these trucks will be operated only in the project sites.
Detailed Explanation
Off-highway trucks are specialized vehicles designed for rugged use in construction or mining sites where public road access isn't allowed. These trucks, such as dump trucks, are built to handle tough environments and heavy loads. Understanding this classification helps in estimating their operational costs because typical highway vehicles may have different costs and wear patterns than those strictly used on work sites.
Examples & Analogies
Consider a race car that is designed to perform at high speeds but can only be used on a racetrack. Similarly, off-highway trucks are like race cars; they have specific tasks and environments where they excel, and that affects their operational strategies and costs.
Annual Usage Calculations
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The truck is expected to have annual use of 1600 hours. So every year the truck is operating for 1600 hours.
Detailed Explanation
Knowing the annual use of a piece of equipment in hours allows managers to calculate costs per hour, which is crucial for budgeting and managing operational efficiency. If a truck operates 1600 hours a year, this figure can be used to estimate wear and tear, fuel usage, and other recurring costs, enabling better financial planning.
Examples & Analogies
Think of it like a bicycle. If you ride it for 2 hours a day, that's about 730 hours a year. Knowing this helps you decide when to replace tires or perform maintenance, similar to how understanding truck hours helps manage costs.
Calculating Depreciation
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So under the ownership cost let us calculate the depreciation first. \( \text{Depreciation} = \frac{\text{(Initial price - Tire cost)}}{\text{Useful life}} \)
Detailed Explanation
Depreciation is a method of allocating the cost of a tangible asset over its useful life. This calculation helps owners understand the value lost each year and can inform decisions regarding repairs or replacements. In this context, the initial price of the truck minus the cost of the tires gives a clearer picture of depreciation related solely to the truck body and functions.
Examples & Analogies
Consider a smartphone that costs $800. After two years, it may only be worth $400. Each year, its value decreases, just like the truck. Understanding this decline helps users know when it's best to upgrade or sell.
Calculating Ownership Costs
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Now let us calculate the hourly ownership cost, so total ownership cost component you can see that one is your hourly depreciation, so other is your hour interest and hourly insurance charges and hourly taxes.
Detailed Explanation
The ownership cost is a comprehensive figure that includes various components such as hourly depreciation, interest on investments, insurance costs, and taxes. By summing these costs, one can determine the total expense per hour for using the equipment, which is essential for pricing and budgeting.
Examples & Analogies
Think of it like owning a home. Each month, you pay the mortgage (depreciation), home insurance (insurance), and property taxes. Combining these amounts gives you the total monthly cost of owning your home, similar to how managers determine the full cost of operating heavy equipment.
Calculating Operating Costs
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So let us move on to the operating cost estimation. So I have given you the question the average fuel consumption factor is 0.09 liters per hour per horsepower.
Detailed Explanation
Operating costs are directly related to the use of the equipment and include expenses like fuel, maintenance, and wages. The fuel consumption factor plays a significant role in determining how much fuel is used, which is a primary expense that must be managed to maintain profitability.
Examples & Analogies
Imagine driving a car; knowing how many liters of fuel the car consumes per kilometer helps you understand your running costs for road trips. Similarly, knowing the fuel consumption of heavy equipment helps managers budget their operations effectively.
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
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Ownership Costs: The total costs incurred from owning equipment.
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Operating Costs: The costs associated with the operational usage of machinery.
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Depreciation Calculation: Important for understanding the wear and value reduction of equipment over time.
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Fuel Usage: Key operational cost determined by machinery efficiency and local fuel prices.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
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Example: A dump truck purchased for 3 crores has a depreciation cost calculated at ₹23,12,000 per year.
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Example: Operating the truck yields an hourly operational cost of ₹3209.29, which includes fuel, FOG, and repair costs.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
🎵 Rhymes Time
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To know your costs, don't let them stall, Depreciation and interest are key for all.
📖 Fascinating Stories
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Imagine a dump truck named Dexter, who travels 1600 hours a year. As he ages, his value decreases, teaching us the importance of calculating depreciation.
🧠 Other Memory Gems
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DIO (Depreciation, Interest, Ownership) helps remember key ownership costs.
🎯 Super Acronyms
FOG (Filter, Oil, Grease) for remembering maintenance costs related to fuel.
Flash Cards
Review key concepts with flashcards.
Glossary of Terms
Review the Definitions for terms.
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Term: Ownership Cost
Definition:
The costs associated with owning equipment, including depreciation, interest, insurance, and taxes.
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Term: Operating Cost
Definition:
Costs related to the operation of equipment, such as fuel, wages, and maintenance.
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Term: Depreciation
Definition:
The reduction in the value of an asset over time, calculated for accounting purposes.
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Term: Hourly Rate
Definition:
The cost associated with operating machinery or paying labor for each hour of use.
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Term: Peurifoy Approach
Definition:
A method of cost estimation that accounts for the time value of money to provide more accurate estimates.