1.1. First Year Downtime Cost

So, downtime cost per hour equal to 3% of your equipment cost. Equipment cost is nothing but 900 rupees per hour.

Downtime cost per hour = (3/100) × (900) = 27 rupees per hour.

To find the downtime cost per hour, we first need to determine what percentage of the equipment cost translates into downtime. In this case, the downtime cost is set at 3% of the equipment cost. The equipment cost is given as 900 rupees per hour. To calculate the downtime cost, we take 3% and multiply it by 900. This gives us the amount of 27 rupees per hour that represents the cost of downtime associated with the machine during its operation.

Think of the downtime cost like a small fee that you pay every hour your equipment is not working efficiently. Imagine if you had a car worth 900 rupees. If 3% of that cost represents the time the car spends in the garage instead of on the road, you would be paying 27 rupees for every hour it is stuck, which is similar to how businesses are affected when machines are idle.

Your machine is going to operate in a year for 2000 hours. So, what is your yearly downtime cost?

Yearly downtime costs for the first year is, Downtime cost per year = 27 × 2000 = 54,000 rupees.

Now that we have the downtime cost per hour (27 rupees), we can project that over a typical operational year for the machine, which operates for 2000 hours. By multiplying the hourly downtime cost by the total hours of operation, we determine the total downtime cost for the year. Hence, the yearly downtime cost for the first year is obtained by calculating 27 rupees multiplied by 2000 hours, resulting in a total of 54,000 rupees.

Consider a restaurant that uses a blender worth 900 rupees. If it breaks down for 2000 hours in a year, the restaurant calculates that it loses 54,000 rupees that year because of that downtime. This emphasizes the financial impact downtime can have on business operations.

Similarly, calculate the downtime costs, let us calculate for the second year... So, downtime cost is 6% of your equipment cost, equipment cost is 900 rupees per hour.

Downtime cost per hour = (6/100) × (900) = 54 rupees per hour.

Downtime cost per year = 54 × 2000 = 1,08,000 rupees.

In the second year, the percentage of downtime has increased to 6%. We apply the same method as before to calculate the cost per hour of downtime. Now, 6% of 900 rupees equals 54 rupees per hour. To calculate the total downtime for the second year, we again multiply this amount by the number of hours the machine operates (2000 hours), which results in a total yearly downtime cost of 1,08,000 rupees.

This can be likened to how a phone might age over time. Let’s say at first it had a 3% chance of malfunctioning, but after a year, it becomes more inefficient, with a 6% chance. If the downtime cost for using that phone now calculates to 1,08,000 rupees, it highlights how older devices may cost more in repairs and downtime than initial estimates.

So, you find the cumulative downtime cost. Everything is done on cumulative basis. So, find the cumulative downtime cost by adding it...

Cumulative cost, end of the first year = (54,000 / 2000) = 27 rupees per hour.

Cumulative cost, end of the second year = (1,08,000 / 4000) = 40.5 rupees per hour.

Next, we need to consider the cumulative downtime costs over the years. After the first year, the cumulative cost per hour was 27 rupees. After the second year, the machine has operated 4000 hours in total (2000 hours each year), with a cumulative downtime cost calculated by dividing the total costs by the total hours. This leads us to a cumulative cost of 40.5 rupees per hour at the end of the second year, reflecting an increase due to the higher downtime percentage.

You can think of this like tracking a subscription service. The first year you pay monthly fees, and by the end of the second year, you average those fees over the entire time. Just like how costs accumulate, your subscription expenses over time increase based on usage and service reliability.

Now, you have to account for the loss in productivity... Productivity adjusted cumulative cost, first year= (40.5 / 0.98) = 41.33 rupees per hour.

In this section, we focus on adjusting the cumulative downtime cost based on productivity factors. After calculating the cumulative cost per hour, we assess what it means for productivity. In the first year, we assume no losses, but in the second year, if productivity drops to 0.98, we adjust the cumulative cost accordingly. Dividing the cumulative cost by the productivity factor gives us a revised cost per hour, revealing how productivity losses can drive up overall costs.

Consider a factory that increases its output requirement after some downtime. They must now run extra shifts and hire temporary help to return to full capacity. This adjustment in labor costs means their operational efficiency reflects higher costs, highlighting how productivity can influence total expenses.

Now, let us calculate the obsolescence cost for every year... Obsolescence cost per hour = 0.12 × 900 = 108 rupees.

Next, we evaluate the obsolescence cost which refers to the costs incurred by keeping old, outdated equipment. For the second year, an obsolescence factor shows that maintenance and performance issues arise, leading to a cost based on that percentage of the equipment's hourly rate. By multiplying the obsolescence factor by the equipment cost (0.12 times 900), we calculate the obsolescence cost of 108 rupees per hour.

This is similar to how older vehicles generally require more repairs and incur higher maintenance costs. As vehicles age, they often become less reliable and may require parts that cost more due to their rarity, thereby increasing your overall yearly expenses.

So, during the 4th year the cost is minimum. So, it is advisable to replace your machine. The economic life means the period during which the cost associated with the machine is minimum.

Finally, we summarize the total costs incurred over the machine's lifetime to determine its economic life. The economic life of a machine is defined as the period where maintenance and operational costs are at their lowest, typically identified as the 4th year in this case. Once costs begin to rise again, this indicates it's time to consider replacing the equipment before incurring unnecessary expenses.

Think of it like living in a rental apartment. Initially, rent is reasonable, but as the apartment ages, costs can begin to rise if the landlord needs to make repairs or upgrades. Eventually, it becomes more financially wise to find a new apartment that meets your needs and is still cost-effective.

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