2.1. Second Year Obsolescence 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

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

In this section, we start by calculating the downtime cost for the equipment. The downtime cost per hour is determined as 3% of the hourly equipment cost. Given an equipment cost of 900 rupees per hour, the downtime cost is calculated to be 27 rupees per hour. This cost accumulates as the machine operates over a year for 2000 hours, resulting in a total downtime cost of 54,000 rupees for the first year.

Imagine you own a taxi service, and one of your car's engine fails, making it unusable for a period. If your taxi brings in 900 rupees per hour, the loss from not using it is equivalent to the downtime cost. Just like how the taxi loses money each hour it cannot operate, machinery in a factory incurs downtime costs when it isn't functioning.

In the second year the downtime percentage is 6%. So, downtime cost is 6% of your equipment cost,

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, we see an increase in the downtime percentage to 6%. This means that the downtime cost per hour now increases to 54 rupees. When we calculate the yearly cost based on 2000 operating hours, the total downtime cost for the second year escalates to 1,08,000 rupees. This highlights how maintenance issues can lead to increased costs as a machine ages.

Consider an aging car—its wear and tear leads to more frequent breakdowns, causing more downtime. Instead of earning money, the car incurs costs during the time it sits idle, reflecting how machinery costs can rise when reliability decreases.

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

So, 54,000 + 1,08,000 gives you 1,62,000.

To understand the total financial impact, we calculate the cumulative downtime costs by adding the yearly costs. For the first year, the downtime cost was 54,000 rupees and for the second year, it was 1,08,000 rupees. Adding these numbers gives us a total cumulative downtime cost of 1,62,000 rupees over the two years. This method helps in keeping track of increasing costs over time.

Think of it like saving money each month. If you save 54,000 rupees in the first month and then another 1,08,000 rupees the next, your total savings build up to 1,62,000 rupees. Similarly, downtime costs add up and affect overall financial health.

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

Similarly, for a second year, it is

Cumulative cost, end of the second year = 1,62,000 / 4000 = 40.5 rupees per hour

After calculating the cumulative downtime costs, we evaluate the cumulative cost per hour. At the end of the first year, the cumulative cost is 27 rupees per hour. At the end of the second year, the cost increases to 40.5 rupees per hour, showcasing how the cost efficiency of operating the machine changes as it ages. This method of calculating cost per hour helps in analyzing the financial sustainability of using older machines.

Just like in a team project, if a member completes their work in a short time, the group's overall efficiency becomes higher. However, if a member takes longer due to disruptions (like machine downtime), the group's efficiency and costs increase. It's similar to how cumulative costs per hour reflect an overall operational decline.

Now, you have to account for the loss in productivity. So, the loss in productivity is also going to result in an increase in the downtime cost of the machine.

As machinery experiences downtime, productivity loss contributes to rising costs. If a machine is frequently out of operation, it not only costs money due to repairs but also affects the overall production rate of operations. Companies must find ways to compensate for this lost productivity to maintain efficiency.

Think of a student who misses class time because of illness. They fall behind in their studies and may need extra tutoring to catch up. Similarly, a machine that sits idle due to frequent repairs must have additional resources allocated to return to its prior productivity levels.

So, I want to say 40.5 is my cost per hour, the productivity corresponding is 0.98. To bring back this productivity to 1, I need to spend some additional cost,

Productivity adjusted cumulative cost, first year = (41.33 rupees per hour)

Productivity adjusted cumulative cost, second year = (55.67 rupees per hour)

To adapt to reduced productivity arising from downtime, we adjust the cumulative costs to reflect the efforts needed to restore maximum productivity. The analysis shows that adjusted costs per hour rise to 41.33 for the first year and 55.67 for the second year. Companies must prepare for these additional costs when machinery does not perform at optimal levels.

Imagine a factory that needs to hire additional workers after one of its machines fails, just to meet production goals. Similarly, adjusting costs for machinery reflects increased risk and the need for more resources to compensate for downtime, much like needing more staff for projects due to an absent team member.

Every year your obsolescence factor is increasing as the machine is becoming more obsolete. We are trying to calculate the cost increased resulting from retaining the old machine with us, which produces at a lower productivity rate.

Over time, older machines become obsolete, leading to increased costs associated with their operation. As technology advances, maintaining older equipment typically results in needing more spending on repairs and lower productivity. This analysis helps quantify the cost of sticking with less efficient machines instead of upgrading to new models that may perform better and more cost-effectively.

Consider your smartphone. If you hold onto an older model, you may find your apps are slower, and updates aren't available. As a result, it could cost you more in time and productivity compared to getting the latest model, which operates seamlessly.

Obsolescence cost per hour = 0.05 × 900 = 45 rupees

Obsolescence cost for the second year = 45 × 2000 = 90,000 rupees

Obsolescence cost for the third year = 0.12 × 900 = 108 rupees

Obsolescence cost per third year = 108 × 2000 = 2,16,000 rupees

In evaluating obsolescence costs, we look at two key years. For the second year, obsolescence costs amount to 90,000 rupees, while for the third year, these costs rise significantly to 2,16,000 rupees. This illustrates how costs related to the aging and inefficiency of machines can accumulate, affecting overall operational budgets.

Imagine a car that has always worked well but is getting older. At first, you only incur minor maintenance costs, but as parts start to fail or technology in new cars advances significantly, those costs increase rapidly, reflecting higher obsolescence.

Now you find the cumulative obsolescence cost. You add it, and you know the cumulative usages for every year it is 2000 hours.

Obsolescence cumulative cost in second year = 90,000 rupees / 4000 = 22.50 rupees per hour

For the third year, it is

Obsolescence cumulative cost in third year = 3,16,000 / 6000 = 51 rupees per hour.

As with downtime costs, cumulative obsolescence costs are tracked over time. By calculating the cumulative cost at the end of the second and third years, we see an increase in the cost per hour due to the added obsolescence of the machine. This helps visualize how retaining older equipment can lead to higher overall costs in the long run.

Just like with your monthly subscription to an outdated software, the more you delay updating, the more money wasted while you maintain software that offers fewer features and leads to missed opportunities. The same principle applies to equipment, where outdated models drain financial resources.

When you add all the total costs, what is the trend we will see? ... at the end of 4th year, it is advisable to replace your machine.

We summarize all expense types—depreciation, investment, maintenance, repair, downtime, and obsolescence—over each year to identify cost trends. Notably, costs initially drop then escalate again after a point, indicating the economic life of the machine. Recognizing this point guides decisions on whether to repair or replace machinery.

Think of a car that you plan to keep for a long time. In the beginning, it might be low maintenance, but after several years, costs can accumulate rapidly for repairs. Recognizing when to sell this older vehicle before repair costs exceed the car's value is key—in essence, identifying optimal replacement times.

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