Reference no: EM131726233

Your contracting company has just been awarded an earthmoving contract that would be well suited for a Caterpillar 950H loaderfor use loading trucks. Your job is to analyze the ownership and operating costs expected for such a unit, compare the costs to a long term lease, and make a recommendation to management on whether to purchase the loader. For simplicity it is expected that all expected costs in the term of ownership and operation will be calculated on an average cost per hour basis. The cost of an operator is not a part of the analysis. A company Excel spreadsheet template is available to assist in formatting your estimate. On the template you are asked to capture the recitation of facts and create the formulas for bringing costs to an hourly basis. Include your completed template as an attachment to your submission. Use of the template is a requirement of the assignment. If you feel that you cannot use the template contact the instructor for alternatives. A local rental yard said that they will supply you with an equivalent Deere loader, new, for $4250.00 per month plus $ 7% sales tax, dry. The lease contract terms define dry as not including any operating costs. (Fuel, Oil, Tires, Wear parts are excluded.) The rental terms provide a 100% warrantee for repair costs of the power train unless they can show evidence of abuse. The lease is for a minimum of 2 years, renewable in one year terms. The lease rate for any year in which the engine clock reading shows more than 2000 hours of work will be adjusted by multiplying the annual lease rate by (annual hours on the engine clock / 2000). The purchase price for the 950H from McAllister, including sales tax, delivery, and a 3 CY bucket is $300,000. Your analysis should be based on the term of the project which is 5 years. For purposes of this analysis plan on selling the loader at the end of 5 years for 50% of the original purchase price. According to the schedules that the project managers have put together it appears that you will be able to get average 1,500 hours of utilization per year on the loader during all five years. Standard company practice is to use a 45 minute efficiency for working hours. According to the Chief Financial Officer of the company your cost of money is 8% which should be applied to the average equipment investment calculated by the AAI methods. Annual insurance on the loader will be 0.4% of the AAI value. Annual property tax can be calculated at 1.5% of the AAI value. Miscellaneous repair and maintenance cost is estimated at $4.00 per hour. Company policy mandates including in your cost estimate $2.50 per hour as a powertrain repair reserve for any hours when the loader powertrain is not under warrantee. As new equipment the warrantee period is 3,000 hrs. Net Flywheel Horse Power is 200 hp and fuel consumption rate is 0.04 gal/fwhp. Off-road diesel fuel cost is $3.00 per gallon. Expected throttle load factor for the loader is 65%. The preventative maintenance schedule that your fleet is on has PM oil changes completed every 250 hours. Engine crankcase capacity is 8 gallon. Figure oil consumption using formula 2.12 at page 39. Oil is $10.00 per gallon. Your tire sales person says that a set of 4 tires will cost $10,000.00, last 2,500 hours and the average tire repairs will be about 15% of the purchase price over the life of the tires. The loader will be scraping the ground about 30% of the time. High-wear ground engaging cutting edges cost $600.00 per set and will last 250 hours performing this application before replacement.

1. What is the estimated ownership cost per hour? _____________________________________

2. What is the estimated operating cost per hour? _____________________________________

3. What is the estimated cost/hour of utilizing the rental machine? _____________________________________

4. Over the duration of the project what is the projected total cost difference between an owned machine and the rental terms offered? _____________________________________

5. What is your recommendation? __________________________________________.