FPL GTR 171

CHARGEOUT! 
Determining Machine and Capital Equipment Charge-out
Rates Using Discounted Cash Flow Analysis

Bilek, E.M. (Ted).  2007.  FPL-GTR-171.  USDA Forest Service, Forest Products Laboratory.  Madison, Wisconsin.

ABSTRACT

A model called ChargeOut! was developed in Microsoft Excel to determine charge-out rates or rates of return for machines and capital equipment. Although it is designed for the forest industry, the methodology is readily transferable to other sectors.

ChargeOut! is based on discounted cash flow analysis. It provides financial outputs that are more accurate than traditional single-period models, which may produce rates that are either too low or too high. ChargeOut! calculates an economic break-even charge-out rate that returns all costs and a specified after-tax return on equity capital. Alternatively, given a negotiated charge-out rate, the model calculates net present values, and real and nominal rates of return before-tax and finance, before-tax and after-tax. It also compares the negotiated charge-out rate with the calculated break-even rate.

The model incorporates inflation. It allows variable operating hours and charge-out rates that may be automatically inflation-adjusted or negotiated each year.  It also allows variable depreciation rates and first-year depreciation allowances. Graphs illustrate the major cost centers and cash flows. Three types of sensitivity analyses are built in.

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 had some background in engineering economics.

In using ChargeOut! to bid for a job, a contractor would use the model to estimate costs for each piece of capital equipment and then add to these labor and any overhead costs.

A pdf of the user manual may be downloaded from http://www.fpl.fs.fed.us/documnts/fplgtr/fpl_gtr171.pdf
The fully-workable Excel model may be downloaded from: http://www.fpl.fs.fed.us/documnts/fplgtr/fpl_gtr171/fpl_gtr171--chargeout.xls

KEY WORDS: Charge-out rate; break-even analysis; capital equipment costing; machine rate, depreciation; inflation; discounted cash flow analysis

For any questions or comments, please contact the author:
E.M. (Ted) Bilek, Economist
USDA Forest Service
Forest Products Laboratory
One Gifford Pinchot Drive
Madison, WI 53726-2398
Tel:  (608) 231-9507
email:  tbilek@fs.fed.us