Equipment Costs - Examples & Applications

Equipment Cost Examples

Step-by-step calculations for ownership depreciation, operating costs, and overall hourly rates.

Example 1: Straight-Line Depreciation

Calculating the annual and hourly depreciation charge using the straight-line method.

A contractor purchases a new heavy-duty excavator for

\

250,000

. It is expected to have a useful life of

5 \text

and an estimated salvage value of

$50,000

at the end of its life. The contractor plans to use the machine for

2,000 \text$ per year.

Calculate the annual depreciation charge using the Straight-Line method, find its book value after

3 \text{ years}

, and determine the hourly depreciation rate to be included in an estimate.

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Example 2: Double Declining Balance (DDB) Depreciation

An accelerated depreciation calculation often used for tax strategies or equipment that loses value rapidly.

A company buys a bulldozer for

\

300,000

. It has a

5\text

useful life and a

$50,000$ estimated salvage value. While straight-line depreciation is common for internal hourly rates, the Double Declining Balance (DDB) method applies a fixed percentage rate (twice the straight-line percentage) to the remaining book value each year. Note that DDB does not initially subtract the salvage value when calculating the base.

Calculate the depreciation charge for Year 1 and Year 2 using the DDB method.

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Example 3: Calculating Operating Costs (Fuel and Lube)

Estimating the hourly cost of consumables based on engine horsepower and load factors.

A motor grader with a

250 \text{ HP}

diesel engine operates under an average load factor of

60\%

. The engine consumes approximately

0.04 \text{ gallons}

of diesel fuel per horsepower-hour at full load. Diesel fuel costs

\

4.00

per gallon on-site. The manufacturer recommends estimating lubrication (oil, grease, filters) as

33%$ of the hourly fuel cost.

Calculate the total hourly cost for fuel and lubrication.

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Example 4: Comprehensive Hourly Equipment Rate Calculation

Combining Ownership (Depreciation, IIT) and Operating Costs (Fuel, Wear Parts) into a single rate.

An estimator is calculating the internal hourly charge rate for a front-end loader. The machine data is as follows:

Initial Cost: $\$ 180,000$
Useful Life / Salvage: $10,000 \text{ hours}$ / $\$ 30,000$
Interest, Insurance, Taxes (IIT): estimated flat rate of $\$ 4.50/\text$
Fuel & Consumables: calculated at $\$ 18.00/\text$
Tires: A set of $4$ tires costs $\$ 12,000 $and lasts$ 2,500 \text$.
Routine Repairs/Maintenance: estimated at $\$ 8.00/\text$

Calculate the total, unburdened (no operator wage) hourly equipment rate for the loader.

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Key Takeaways

Equipment costs are strictly divided into Ownership Costs (fixed, occurs whether machine runs or not) and Operating Costs (variable, occurs only when running).
Straight-line depreciation provides uniform deductions per hour, ideal for internal estimating rates.
Double Declining Balance effectively accelerates depreciation, creating higher initial deductions but ignoring initial salvage value in the base calculation.
Major wear items like tires or undercarriages are often stripped from the initial cost and depreciated separately based on their shorter lifespans.

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