3. Summary of Costs and Economic Life Assessment

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 = × (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.

To calculate the downtime cost, first, you find the percentage of the equipment cost that is lost per hour due to downtime. In this case, it's 3% of the equipment cost of 900 rupees per hour, which comes to 27 rupees per hour. Then, to find the total downtime cost for the year, multiply this hourly downtime cost by the total operating hours in a year, which is 2000. Therefore, the total downtime cost for the year equals 27 rupees per hour multiplied by 2000 hours, resulting in a total of 54,000 rupees for that year.

Imagine you own a delivery service with a truck that costs you a certain amount to own and operate. If the truck is out of commission for repairs, you lose money for every hour it is not delivering packages. Just like how the truck's downtime costs you, equipment downtime similarly costs businesses money in lost productivity.

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

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

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

For the second year, the downtime percentage has increased to 6%. Calculate the new downtime cost by taking 6% of the equipment cost (900 rupees per hour), which comes to 54 rupees per hour. To find the total yearly cost, multiply this new hourly rate by the same yearly operating hours (2000), which totals 1,08,000 rupees.

Think of a situation where your truck needs more repairs than expected, costing you even more. If the repairs lead to more downtime, you can see how quickly your costs can add up just like they do with equipment that faces increasing downtime.

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

So, 54,000 + 1,08,000 gives you 1,62,000, 1,62,000 + 1,62,000 gives you 3,24,000 for the third year.

To track the financial impact of downtime over the years, cumulative costs are calculated by continually adding the yearly downtime costs. Starting with the first year at 54,000 rupees, then adding the second year's downtime cost of 1,08,000 rupees brings the cumulative total to 1,62,000 rupees. By adding this to the third-year costs, you keep a running total of downtime expenses over the years.

Suppose you run a café, and each month you track the losses from downtime. By the end of the year, you can see how much you’ve lost cumulatively from all the months combined. This not only helps you budget better but also illustrates how much repairs can add up significantly over time.

Now, you have to account for the loss in productivity. So, the loss in productivity is also going to result in increase in the downtime cost of the machine. So, as we discussed earlier the loss of productivity results in increase in production cost because the machine has spent the time in the repair yard.

When a machine is down, it not only incurs downtime costs but also contributes to decreased productivity. This means that production may slow down, and to compensate, additional resources may need to be employed—like hiring extra workers or operating more hours. This further increases the overall cost linked to the downtime, highlighting the intertwined relationship between productivity loss and financial impact.

Imagine you own a restaurant and your main oven has to be repaired. While it's being fixed, you can’t prepare as many dishes, so the staff may have to work longer hours to catch up once it’s ready. This added labor cost is akin to the productivity costs experienced in machinery repairs.

Now, let us move on to the next cost, which is nothing but your obsolescence cost. Every year your obsolescence factor is increasing as machine is becoming more obsolete...

Obsolescence cost refers to the financial burden incurred from keeping an older machine that becomes less efficient over time compared to newer, more advanced models. As technology evolves, older equipment may not be as productive, leading to increased maintenance and repair costs, and potentially leading to a decision to replace the machine due to better, cost-effective options available in the market.

Consider how smartphones become outdated within a few years as new features are introduced. Holding onto an older model means missing out on functionalities and efficiency, ultimately leading to higher costs related to repairs and inefficiency when compared to having the latest model.

So, this obsolescence factor is also calculated as a percentage of a equipment cost. Equipment costs you know, approximately 900 rupees per hour we are going to use a value here...

To quantify obsolescence costs, calculate it similarly to downtime costs. For example, if the obsolescence factor for the second year is 0.05, multiply this by the equipment cost (900 rupees per hour) to get an hourly obsolescence cost. Then, calculate the total yearly cost by multiplying the hourly rate by the number of operating hours.

This is like holding onto an older model of a car. While it might have initially been a good investment, as time goes on, it becomes less fuel-efficient, and you spend more on repairs and maintenance compared to a newer, more efficient model.

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