3.3. Equipment Ownership Cost Estimation Approaches

Try these first

1. 1.

   What are owning costs?

   Hint

   Think about the long-term costs that do not change with usage.

2. 2.

   What is operating cost?

   Hint

   Consider costs that fluctuate based on equipment usage.

3. 3.

   What does Owning Cost typically include?

   • Operating Costs
   • Fuel Costs
   • Depreciation and Interest

   Hint

   Think about costs that accrue regardless of usage.

4. 4.

   True or False: The Average Annual Investment Method accounts for the time value of cash flows.

   • True
   • False

   Hint

   Focus on what the method implies about cost estimation.

5. 5.

   A construction project requires a bulldozer. Its initial purchase cost is $100,000, with an expected life of 10 years and an estimated yearly operational cost of$15,000. Calculate the Average Annual Investment.

   Hint

   Add both parts together before dividing by the lifespan.

6. 6.

   If a company anticipates cash inflows from machinery depreciation over time and expects a future cash flow of $30,000 in 5 years, calculate its present value using a discount rate of 5%.

   Hint

   Be sure to factor in the interest rate when discounting.