Question

A contractor has purchased a wheel loader for $115,000 and plans to use it 2,000 hours per year. The cost of one set of tires is $25,000. At this usage rate, the contractor anticipates disposing of the loader after using it for 10 years and realizing a salvage value of $35,000. The flywheel horsepower rating of the loader’s diesel engine is 105 horsepower. The interest rate is 10%. The loader operator will earn $34.00 per hour including fringe benefits, and diesel fuel costs $1.20 per gallon.

Please calculate the hourly tire depreciation cost of the second set of tires considering the time value of money, assuming that the loader has a service life of 10 years and operates 2,000 hours per year, and a set of tires can be expected to last 4,000 hours.

Answer 1

Basic Information

Particulars	Amount
cost of Wheel Loader	115,000
salvage value	35,000
hrs used per year	2,000
years	10

Particulars	Amount
cost of one set of tires	25,000
hours life	4,000
Total life in years	2

Explanation of Total life in years - total life of tires is 4000 hours but the wheel loader is used in one year 2000 hours hence tires will also be used in 2000 hours. At the end of 2 years first set of tires will be fully used and second set will be required to be purchased.

Assumption is Cost of tires given $25,000 will remain same even after two years.

As question requires depreciation should be calculated considering time value of money. we will have to find the present value of tires, i.e 25000 at the given rate of 10%

The present Value factor of 10% for two years is 0.8264 (This can be calculated as 1/1.1^2 1 i.e 1 divided by 1.1 raise to 2)

Present Value of second set of tiers is 25000 X 0.8264 = $20,660

Depreciation of second set of tiers per hour will be $20,660 / 4000 = $ 5.165