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.

How much is the hourly tire repair cost if it is estimated that the tire repair is 25% of the tire depreciation and the life of the tires is 4,000 hours.

Answer 1

Given Cost of wheel loader=$115000

Cost of tyres is =$25000

Salvage value of wheel loader =$35000

One needs to remember that even though value of tyres is given seperately, it is not a seperate altogether, but is an important part of the wheel loader and has different usage from the equipment and so could be depreciated in different way from that of the wheel loader.

So, If salvage value of wheel loader is $35000, salvage value of tyres will be  

At $115000-----$35000

$25000 -----?

So salvage value of tyres =$25000×($35000÷$115000) =$7610*

*rounded off to nearest $10.

Depreciation of tyres =($25000-$7610)÷4000hrs=$4.3475 per hour

Hourly repair Cost of tyres

=25% of depreciation on tyre (given)

=25% of $4.3475

=$1.086875

So, hourly tyre repair cost is $1.086875