Equipment Decision
You are working as a mining engineer for an operating mine in its final state. The existing equipment (excavator and
the haul truck fleet) is getting older and should be replaced in two years. Management asks you if the system should
be maintained, or if the operation should go immediately for a band conveyor system. So Option A would be to replace
the excavator and the haul truck fleet in two years from now. Option B would be to invest in a band conveyor system
with a mobile crusher and three wheel loader right now.
Use dynamic investment calculation methods (NPV; EAC; ROI) to find the most profitable equipment combination.
Option A: Excavator and haul trucks
Option B: Loader and band conveyor
- Assumptions: 84 kt ore reserves (left) with 14kt/a capacity
- Op. Costs:
- 28 k€/a Processing
- 3 €/t Transport
- Labour and Means of Production see table
- Revenues: 185 €/t
- 12% p.a. interest rate, No residual values
Costs: (in €)
| Option A | Option B | |
|---|---|---|
| Labour | 500,000 p.a. Year 1+2 |
Labour 415,000 p.a. |
| 450,000 p.a. Year 3-6 |
||
| MoP | 34 p.t. Year 1+2 |
MoP 25 p.t. |
| 25 p.t. Year 3-6 |
||
| Invest | Excavator 6,130,000 5a Life time |
3 wheel loader 2,295,000 4a Life time |
| 3 Haul trucks 2,430,000 5a Life time |
Crusher (mobile) 800,000 10a Life time |
|
| Band conveyor system 1,100,000 8a Life time |
Approach: LOM, NPV, EAC, ROI
First Step: Calculate LOM
Second Step: NPV
Option A
The operating surplus (OS) amounts to:
Revenues: 185 € /t ∙ 14 ∙ 10³ t /a = 2,590,000 € /a
Costs:
Year 1 and 2 [in €/a]:
- Processing 28,000
- Transport 42,000
- Labour 500,000
- MoP 476,000
- TOTAL 1,046,000
Year 3 to 6 [in €/a]:
- Processing 28,000
- Transport 42,000
- Labour 450,000
- MoP 350,000
- TOTAL 870,000
OS = Revenues – Costs → 1544k€ for year 0-2 and 1720k€ for year 3-6
Invest for year 2: 8560k€
| [10³] | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|---|
| OS | 1544 | 1544 | 1544 | 1720 | 1720 | 1720 | 1720 |
| (1+i) | 1.0000 | 1.1200 | 1.2544 | 1.4049 | 1.5735 | 1.7623 | 1.9738 |
| A | 8560 | ||||||
| PV | 1544 | 1378.57 | -5593.11 | 1224.26 | 1093.09 | 975.974 | 871.4055 |
| NPV | 1494.192 | ||||||
Option B
OS:
Revenues: 185 € /t ∙ 14 ∙ 10³ t /a = 2,590,000 € /a
Costs:
- Processing 28,000
- Transport 42,000
- Labour 415,000
- MoP 350,000
- TOTAL 835,000
→ OS 1,755k€.
Invest for year 0: 4,195k€
Re-Invest: 2,295 in year 4
| [10³] | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|---|
| OS | 1755 | 1755 | 1755 | 1755 | 1755 | 1755 | 1755 |
| (1+i) | 1.0000 | 1.1200 | 1.2544 | 1.4049 | 1.5735 | 1.7623 | 1.9738 |
| A | 4195 | 2295 | |||||
| PV | -4195 | 1566.964 | 1399.075 | 1249.174 | -343.18 | 995.8341 | 889.1376 |
| NPV | 1562.006 | ||||||
→ NPV would prefer Option B
Third Step: EAC
Option A: PA = 1494 * 0.2432 = 363k€ and 25€/t
Option B: PA = 1562 * 0.2432 = 380k€ and 27€/t
→ EAC would prefer Option B
Fourth Step: ROI
ROI = PA / SUM(A)
Option A: 363 / (8560 / 1.2544) = 5.3%
Option B: 380 / (4195 + 2295 / 1.5735) = 6.7%
→ ROI would prefer Option B
Remarks
Only if we had a significant difference (of invested capital) with more than (12+6,2%) interest rate, a supplement investment would be necessary.
Be aware that the change in labour costs could be interpreted been caused by firing some truck drivers, which may cause additional costs. This can be neglected, if the people are re-distributed within the company.
We need to invest to continue the operation, so the focus is on what option is to prefer, not if it is economic at all. Not continuing is not an option.
Transport and processing costs in this case are assumed to be the same for both.
There are no residual values considered.
Maintenance costs are assumed to be included in operation costs.
The replacement for option B is done right away, as there is some transition time to the new system assumed.
Although it is a running operation, there is no CF in year 0, as there is no CF from THIS investment.
