Machine hour rate: example
All costs of a machine are spread over its running hours: depreciation on replacement value, interest on half the purchase cost.
Worked example
For a machine: replacement value £144,000.00, useful life 8 years (straight line), purchase cost £101,000.00, imputed interest rate 10%, floor space 35 m² at £10.00 per m² per month, maintenance £5,200.00 a year, power 60 kW at £0.25 per kWh. Running time 1,300 hours a year.
Worked solution
- 1.Depreciation = £144,000.00 / 8 = £18,000.00 (on replacement value)
- 2.Interest = £101,000.00 / 2 × 10% = £5,050.00 (on half the purchase cost)
- 3.Space = 35 × £10.00 × 12 = £4,200.00; maintenance £5,200.00; fixed total = £32,450.00 → per hour £32,450.00 / 1,300 = £24.96
- 4.Energy per hour = 60 kW × £0.25 = £15.00; machine hour rate = £39.96
Typical mistake: Charging imputed interest on the full instead of half the purchase cost.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
For a machine: replacement value £230,000.00, useful life 10 years (straight line), purchase cost £162,000.00, imputed interest rate 6%, floor space 33 m² at £11.00 per m² per month, maintenance £3,200.00 a year, power 31 kW at £0.30 per kWh. Running time 1,500 hours a year.
Imputed depreciation per year in £
Imputed interest per year in £
Machine hour rate in £ per hour
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Depreciation = replacement value / useful life
- Imputed interest = purchase cost / 2 × rate
- Space = area × rent per m² × 12
- Rate = fixed costs / running hours + variable costs per hour (power)
Typical mistake: Charging imputed interest on the full instead of half the purchase cost.
Frequently asked questions
What is the typical mistake in "Machine hour rate: example"?
Charging imputed interest on the full instead of half the purchase cost.
Why charge interest on half the purchase cost?
With depreciation, on average only about half of the capital is tied up over the useful life.