ChargeOut! : determining machine and capital equipment charge-out rates using discounted cash-flow analysis

Abstract

The model ChargeOut! was developed to determine charge-out rates or rates of return for machines and capital equipment. This paper introduces a costing methodology and applies it to a piece of capital equipment. Although designed for the forest industry, the methodology is readily transferable to other sectors. Based on discounted cash-flow analysis, ChargeOut! provides more accurate financial outputs than traditional single-period models. ChargeOut! produces a break-even charge-out rate that will return any specified after-tax real rate of return over the economic life of the capital equipment. Alternatively, given a negotiated charge-out rate, the model produces net present values and real and nominal rates of return before tax and financing, before tax, and after tax. It also compares the negotiated charge-out rate with the calculated break-even rate, incorporates inflation, accounts for depreciation, and automatically conducts a sensitivity analysis. Graphs illustrate the major cost centers and cash flows. The model is both automated and flexible. Interpretation of ChargeOut!’s results requires some knowledge of discounted cash-flow analysis. The target audience is financial professionals in the logging industry or equipment owners who have some background in engineering economics. ChargeOut! is illustrated using representative data from a logging skidder; however, the methodology could be adapted to find charge-out rates or rates of return for any piece of capital equipment.

Citation

Bilek, E.M. (Ted) 2007. ChargeOut! : determining machine and capital equipment charge-out rates using discounted cash-flow analysis. General Technical Report FPL-GTR-171. Madison, WI: U.S. Department of Agriculture, Forest Service, Forest Products Laboratory. 33 pages