Intermediate Equipment Handbook
Intech Associates
Figure 1.5 Case Study
A Zimbabwean contractor bought a piece of imported equipment costing
Z$1,000,000 in August 1998 when the exchange rate was US$1 = Z$ 22. The
supplier arranged a 3 year US$ loan to cover 80% of the purchase cost at 9%
interest rate. The 20% deposit was paid cash by the contractor. Interest
payments started immediately and amounted to Z$6,000 per month plus
repayment of principal of about Z$23,000 per month.
Unfortunately 2 months later the exchange rate had changed to US$1 = Z$35.
The outstanding capital to be repaid had actually risen in local currency terms
from Z$800,000 to Z$1,200,000. The interest payments rose to Z$ 9,000 per
month and the monthly capital repayments had risen to Z$35,300.
1.3.4 Cost and availability of Finance
The availability and cost of finance are related to the economic climate in the
country. In times of economic uncertainty the availability of finance for relatively
risky equipment procurement can be difficult to obtain. Furthermore the interest
rates tend to increase in actual and real terms to reflect the greater risks to the
borrower and lender.
The current commercial finance rates in the UK (2012) are about 7 - 10% per
annum. Rates of below 10% are fairly typical of the developed economies.
However, in recent years, the availability of finance has become an issue even in
developed economies. Finance rates are usually much higher in developing
countries4 and this raises equipment ownership costs considerably.
It can also be very difficult for local contractors to be able to secure finance for
equipment purchase as lending institutions will often require very onerous terms
or collateral. Some will not even loan to local contractors.
Where there are quotas or availability restrictions of finance to the sector, that
means that there is a ‘premium’ or elevated ‘market’ rate for finance.
1.3.5 Economic Life
Heavy plant manufacturers usually quote initial economic life for their machines
as approximately 10,000 - 12,000 hours. Agricultural tractors are usually
expected to have an initial economic life of 6,000 hours to 10,000 hours or more,
depending on engine type, configuration and power. These figures assume that
4 MART Working Paper No 2 (1997) reported bank interest rates of 15 - 48% per annum in the
developing countries surveyed.
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