Reference no: EM132747255

ENGIN5510 Company Economics and Finance - Federation University Australia

Project
A contractor has been invited to submit a tender for the removal of waste from an open cut mine, at 2 million BCM per year. The contractor utilises the following equipment:
• Caterpillar 992K Front End Loaders (13.68 tonne payload); and
• Komatsu HD785-5 Rear Dump Trucks (99.0 tonne payload).

In bidding for the waste removal contract, the contractor must determine how many trucks and loaders are required to meet the production target and the cost of production. The contractor is also unsure whether to continue with the same equipment or upgrade to larger equipment.

The productivity results are to be reported by volume rather than weight. Since we are working in metric units, this will mean that productivities are expressed as bcm/op.hour, bcm/shift and bcm/year.

The waste has an insitu bank density of 2.2 tonnes/cu.metre. The material swell factors are used to convert bank volumes to loose volumes in the loader bucket and the truck tray. Note that both swell factors are based on insitu volume. The swell factors for the waste the contractor is to move are as follows:

Swell Factor - Insitu to Loader Bucket 1.20 Swell Factor - Insitu to Truck Tray 1.25

For the contractor's loaders mining waste, set the loader bucket fill factor to average. This should equate to a factor of 0.72 on a heaped basis (0.87 on a struck basis) for a Front End Loader.

The contractor operates on two shifts per day, from Monday to Friday. In addition, there is one over-time shift on Saturdays. The only rostered days of the year that are not worked are Christmas Day and Good Friday. The contractor annually allows for ten shifts lost due to industrial action and ten shifts lost as a result of wet weather.
Each shift is ten hours long. The following delays occur within each shift:

Crib break 30 minutes operating
Delays either side of crib 2 x 5 minutes operating Delay at start of shift 5 minutes non-operating Delay at end of shift 5 minutes operating
Delays for blasting 5 minutes non-operating Clean-up around loader 15 minutes operating
Refuelling is carried out outside normal production hours.

The contractor's 992 loaders have an expected mechanical availability of 90% and each loader pass takes 35 seconds.

The capital cost to the contractor of a 992G loader is $400,000. The contractor bases its cash flow on a 10% salvage value at the end of the loader life of 25,000 hours or 5 years (whichever occurs first). The loaders are depreciated at a rate of 15% on a straight line basis.

This operating cost consists of the following components:

Operating Labour $54.76/op.hr Maintenance Labour $19.52/op.hr Liquid Fuels $25.26/op.hr
Lube $3.79/op.hr
Tyre Replacement $11.01/op.hr Wear Items $6.00/op.hr
Repair Parts $45.00/op.hr Major Overhaul $18.00/op.hr

The contractor's trucks are equipped with standard motors and are designed to carry the manufacturer's rated payload. The Komatsu HD785-5 trucks have an availability of 85%.

Operational studies show a spot time at the loader is 24 seconds, dump spot time is 20 seconds and a dump time of 30 seconds.

The truck capital cost is $200,000. A 10% salvage value at the end of the truck life of 30,000 hours or 6 years is assumed. The trucks depreciate at 25% on a straight-line basis.

This operating cost consists of the following components:

Operating Labour $46.37/op.hr Maintenance Labour $18.24/op.hr Liquid Fuels $17.24/op.hr
Lube $2.59/op.hr
Tyre Replacement $10.91/op.hr Wear Items $4.30/op.hr
Repair Parts $24.08/op.hr Major Overhaul $10.75/op.hr

Figure 1 shows a typical haul profile on which the waste contract is based. Conditions to be expected in the mine are listed below:
• Within 50 metres of the shovel and dump point, the truck speed is restricted to 30 km/hr;
• Around corners, trucks should not exceed 30 km/hr.; and
• When travelling down ramps, trucks must not exceed 40 km/hr.

Figure 1 (grades for each section are shown in the figure, assume a rolling resistance factor of 40kg/tonne)

The haul profile in figure 1 is representative of haul routes at the mid-life of the waste contract. In the early years the pit is shallower and in the later years it is deeper. The change in RL and the length of the ramp out of the pit vary as follows:

The distance and elevation from the surface to the top of the waste dump do not change. In planning we need to understand how the productivity requirements change for the life of the contract.

The contractor wishes to investigate the cost benefits of moving to larger equipment for the waste removal contract. The details of the larger equipment items in which the contractor is interested are as follows:

With this equipment each loader pass takes 30 seconds. Also for the trucks the spot time at the loader is 30 seconds. The spot time at dump is 30 seconds and the dump time is 30 seconds.

Some questions the student should address in their submission: What is the Loose Density in the loader bucket?

What are the total annual working hours for the loader? What are the total fleet operating shifts for the year?

What is the total operating cost per hour?

What is the total operating cost per hour for the truck? What is the optimum fleet size?

Which equipment fleet would you recommend the contractor purchase? Students should detail any assumptions they make.

Results should be submitted as a report, showing the calculation methodology, with detailed calculations presented as appendices.

Assessed Questions

Question 1. Maintenance costs for a new piece of mining equipment are expected to be $20,000 in the first year, rising by $2,500 per year thereafter. The machine has an expected life of 10 years and interest is 5% annually. To evaluate bids from outside firms for a maintenance contract you need to know the present value of these costs. What is this value?

Question 2. What is meant by the term cash flow? For the table below determine the yearly cash flows and the total cash flow. If a discounting rate of 8% is used what is the Net Present Value?

Year	0	1	2	3	4	5	6
Revenue			170	200	230	260	290
Operating cost			-40	-50	-60	-70	-80
Capital costs	-200	-100
Tax costs			-30	-40	-50	-60	-70
Project cash flow

Question 3. A coal stripping company currently operates three dozers for reclamation work. To reduce costs three alternatives are being considered for the future: rebuild the present equipment, purchase new dozers and employ a contractor. Details of the alternatives are given below:
If interest is 5% annually, which alternative should be selected?

	Rebuild	Purchase	Contractor
No of units required	3	2	N/A
Initial cost per unit	$360,000	$920,000	$0
Annual              costs           per unit:
Maintenance	$140,000	$85,000
Labour	$240,000	$160,000	$2,000,000
Supplies	$58,000	$42,000
Life	8 years	8 years	8 years
Salvage value per unit	$0	$120,000	$0

Question 4. A Truck is purchased for $200,000 and is planned to have an operating life of 8 years working 5,000 hours per year. What is the hourly owning cost of this machine, assuming the company requires a 12% return on investment, using

a) The average investment method
b) The equivalent lease cost method

Question 5. A system of mining requires 3 operators at any one time. The mine operates on a three shift basis per day, 6 days per week. Allowing for availability the mining system operates 5,000 hours per year. Each worker costs $105,000 per year. Assuming all personnel are required on service shifts, an absenteeism rate of 5%, determine the hourly cost of labour.

Question 6. Undertake both a declining balance and straight-line depreciation of an item of capital expenditure of $10 million. The declining balance depreciation rate is 30%, effective tax rate is 40%, cost of capital is 10% and straight-line depreciation rate is 20%.

Question 7. The table below details three possible alternatives to replace existing machinery. The life of each alternative is 5 years. Assuming the cost of capital is 10%, depreciation for tax purposes of capital expenditure is allowable at 30% on a declining balance basis and the effective tax rate is 45%. Determine the preferred alternative.

Alternative	Capital Expenditure $	Annual Operating Cost $	Salvage value $
A	700,000	200,000	100,000
B	900,000	130,000	150,000
C	1,300,000	70,000	300,000

Question 8. An item of equipment is to be purchased for $950,000. The anticipated operating costs, maintenance costs and salvage values for each year are detailed in the table overleaf. Determine the economic life of the equipment. It may be assumed that the cost of capital is 10%, depreciation for tax purposes of capital expenditure is allowable at 30% on a declining balance basis and the effective tax rate is 50%.

$
Years of service	Operating cost for year	Maintenance cost for year	Salvage value at end of year
1	40,000	10,000	100,000
2	60,000	10,000	90,000
3	70,000	12,000	80,000
4	70,000	14,000	70,000
5	80,000	16,000	60,000
6	80,000	18,000	50,000
7	80,000	20,000	40,000
8	80,000	25,000	30,000
9	100,000	26,000	20,000
10	110,000	28,000	10,000

Question 9. A truck powered by a diesel engine working at a 100% load factor is operated at a mine. If fuel consumption for this truck is 0.3 l/kW and the truck is rated at 1,600 kW what is the level of fuel consumption per hour and the cost of fuel per hour for the following conditions:

a) Load factor low = 0.2
b) Load factor medium = 0.35
c) Load factor high = 0.6 Assume cost of diesel is $ 1.20 /l.

Question 10. A large rear dump truck working in a coal mining operation under good conditions has a current purchase price of $ 600,000, including $ 80,000 for the initial cost of six tyres. What is the net capital cost?

If the repair factor is 0.25 x 10-4 and for good conditions the job factor is 0.8, determine the estimated repair cost per operating hour?

If major overhaul costs are estimated at 15% of the net capital cost and this occurs every 20,000 hours determine the major overhaul cost per operating hour?

If maintenance labour costs are $50/ person hour, a single maintenance person is required and the maintenance labour requirement is estimated at
0.8 person hours per operating hour determine the maintenance labour cost?

Determine the total maintenance cost?

Question 11. An excavator has a purchase price of $1,200,000, has a rating of 1,900 kW, an estimated life of 10 years an annual operating usage of 4,000 hours. A return on investment of 10% is required. For the following conditions determine the owning cost, total operating and total cost per operating hour for the excavator.

a) Fuel cost $1.20/l, load factor 0.5, fuel consumption of 0.3 l/kW per hour
b) Lubrication @ 25% of fuel cost
c) Wear cost allowance = $ 19.75 per hour
d) Repair factor of 0.25 x 10-4, job factor of 1
e) Major overhaul every 10,000 hours, at 15% of capital cost
f) Maintenance labour costed on maintenance ratio of 1.25 hours/operating hour, personnel costing $45,000/ person year. Single operator required per shift, 3 shifts per day at an operator cost of
$98,000 per person year

Question 12. For the project outlined in the Table determine the Net Present Value of the project. The cost of Capital is 8%.

Year	Capital Expenditure $ 000's	Operating Expenditure $ 000's	Revenue $ 000's
1	25,000	1,000	5,500
2		1,100	8,400
3		1,100	10,400
4		1,200	11,600
5		1,400	12,600
6		1,400	12,600
7		1,500	10,600
8		1,500	9,600
9		1,500	8,600
10		1,800	8,600
11		1,800	5,800

Question 13. Define the following terms:
a. CAPEX
b. Indirect costs
c. Salvage value
d. OPEX
e. Balance sheet
f. Debt: equity ratio
g. Discount rate
h. Inflation
i. Internal rate of return
j. Net present value
k. Opportunity cost

Question 14. Three fans are to be installed at a mine site; one immediately at a price of
$560,000, one in five years at an estimated cost of $610,000 and the third in eight years at a cost of $680,000. Determine the total expenditure as a present value if the annual interest rate is 6%.

Question 15. Electrical power costs at a mine are estimated to be $850,000 in each of the next 12 years. Determine the present value of this expenditure at an interest rate of 12%.

Question 16. Tenders received from manufacturers indicate that a fan priced at $150,000 will cost $220,000 per year to run, whilst a fan costing $265,000 will require $190,000 per year in operating costs. If the costing period is five years with an annual interest rate of 10%, determine which fan is the most economical.

Question 17. A mine shaft is to be sunk at a cost of $200 million. The life of the shaft is estimated to be 25 years during which time the average planned rate of mineral production is
2.6 million tonnes per year. If the annual interest rate is 6%, determine
i. The equivalent annual cost of the shaft in $ per year
ii. Corresponding production cost in $ per tonne mined

Question 18. An underground airway is driven at a capital cost of $1.15 million. In its eight year life it is planned to pass an airflow of 1080 m3/s at a frictional pressure drop of 720 Pa. The main fans operate at an efficiency of 87%. The annual interest rate is 7% and the average cost of power is $1.25 per kWh, determine the annual cost of owning and operating the airway. (Hint air power = pressure x air quantity)

Question 19. How can inflation and risk factor be accounted in a standard discounted cash flow analysis?