A contractor owns a wheel tractor that has an initial cost of $435,000. Its estimated useful life is 8 years, 2,000 hours per year. The tractor has a diesel engine of 264 HP. The site conditions necessitate oil changes every 120 hours and the crankcase of the engine has a capacity of 8.72 gallons. The unit price of diesel fuel and lubricating oil are $2.14 per gallon, and $8.64 per gallon, respectively. Take the operating factor as 70%.

1. Calculate the hourly cost of owning and operating this tractor.

a) Use the standard approach

b) Use the PSSS approach. Assume maintenance and repair cost is 100% of depreciation. Take MARR = 12%. The tax rate of the company is 50% and the equipment is considered to be in the 7-year MACRS class. No major repairs are anticipated.

c) Which approach is more conservative for the contractor?

2. Assume that the tires of the tractor mentioned in Problem 1 cost $40,000 and have an estimated life of 2 years under the given site conditions. What is the hourly cost of owning and operating this wheel tractor if the tires are considered separately from the rest of the equipment?

a) Use the standard approach. Assume transportation / assembling / dismantling cost for tires as 5% of the tires' depreciation. Take maintenance and repair cost for tires as 15% of the tires' depreciation. No spare parts cost is involved.

b) Use the PSSS approach. Assume maintenance and repair cost of machine (minus tires) is 100% of depreciation, and maintenance and repair cost of tires is 15% of the tires' depreciation. Take MARR = 12%. The tax rate of the company is 50% and the equipment is considered be in the 7-year MACRS class, whereas the tires in the 3-year MACRS class. No major repairs are anticipated.

c) Which approach is more conservative?