2.2. Third 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 = $\frac{3}{100} imes (900) = 27$ 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 = $27 \times 2000 = 54,000$ rupees.

This chunk explains how to calculate the downtime cost of the equipment. The downtime cost is derived from a percentage of the equipment's hourly cost. With an equipment cost of 900 rupees per hour, 3% is used to calculate a downtime cost of 27 rupees per hour. The total downtime cost in a year is then found by multiplying this hourly rate by the total operational hours in a year (2000 hours), resulting in a total of 54,000 rupees for downtime in the first year.

Think of it like a coffee shop. If the rent for the shop is 900 rupees per hour, then if for some reason they have to close for 3% of that time, they would have a loss of 27 rupees per hour. If the shop is open 2000 hours a year, then that would result in a total loss of 54,000 rupees due to the time it couldn't serve customers.

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 = $\frac{6}{100} \times (900) = 54$ rupees per hour.

Downtime cost per year = $54 \times 2000 = 1,08,000$ rupees.

In the second year, the downtime percentage increases to 6%. This means the downtime cost per hour is now calculated at 54 rupees (6% of 900 rupees). The yearly downtime cost also increases accordingly to 1,08,000 rupees when this hourly cost is multiplied by 2000 hours of operation. Such calculations help in anticipating increased operational losses due to machine downtime.

Consider a delivery service. If their vehicle costs 900 rupees per hour to keep on the road, and they face downtime affecting 6% of their delivery time, they'd lose 54 rupees per hour. Over the year, that could add up to a substantial loss, akin to how a coffee shop might lose money when forced to close for repairs or issues.

Now, 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. For the third year, if you calculate this way, it will keep on adding up from the previous years. Yearly downtime costs for the third year would similarly be calculated.

This chunk focuses on calculating cumulative downtime costs over multiple years. The cumulative cost is obtained by adding the previous year's downtime costs together with the current year’s. For example, adding the first year's cost (54,000) and the second year's cost (1,08,000) gives a cumulative downtime cost of 1,62,000. This practice shows the total financial impact of maintaining and operating the equipment versus its performance over the years.

Imagine if you were keeping track of losses from two different businesses. Business A lost 54,000 rupees last year and Business B lost 1,08,000 this year. You would want to know their combined losses to understand how much money you're effectively losing overall. In equipment management, evaluating cumulative costs helps gauge long-term fiscal health.

Cumulative cost, end of the first year = $\frac{54,000}{2000} = 27$ rupees per hour. Similarly, for the second year, it is cumulative cost, end of the second year = $\frac{1,08,000}{4000} = 40.5$ rupees per hour.

In this chunk, we divide the cumulative downtime costs by the cumulative number of operational hours. After the first year, the cost per hour is calculated to be 27 rupees, and at the end of the second year, it increases to 40.5 rupees. This indicates an increase in the cost burden per operational hour due to rising downtime, providing a clear view of expense escalation as operational demands change.

If we think of our coffee shop again, after the first year, their average loss is 27 rupees every hour they are open due to being shut down for repairs. In the second year, as their reliability worsens, the loss increases to 40.5 rupees per hour. Understanding these changes allows business owners to make informed decisions.

Now, you have to account for the loss in productivity. So, as we discussed earlier the loss of productivity results in increase in the downtime cost of the machine.

Here, quite prominently, the discussion shifts to the concept of productivity loss associated with equipment downtimes. As machines malfunction or require repairs, productivity decreases, leading to higher overall costs. This situation complicates cost calculations and influences investment decisions surrounding machinery maintenance or replacement.

Think of a gardener who has a broken lawnmower. While trying to fix it, the gardener can't maintain the yard as efficiently. As downtime increases, the gardener is forced to hire help, leading to further expenses. This example illustrates the widening impact of productivity loss on financial outlay.

So, every year your obsolescence factor is increasing as machine is becoming more obsolete. Here we are trying to calculate the cost increased resulting from retaining the old machine.

In this part, obsolescence costs are introduced as factors that increase with the age of the machinery. Obsolescence arises when older machines become less efficient than available newer models, leading to increased repairs, lower productivity, and potentially higher operational costs. Calculating these costs helps justify the expense of investing in new equipment.

Imagine an old smartphone that takes longer to operate apps compared to a new model. While you still use it, its inefficiency in processing slows down your tasks, potentially causing you to miss deadlines or perform poorly. Therefore, holding on to outdated technology incurs hidden costs that accumulate over time.

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

This chunk emphasizes understanding the 'economic life' of a machine, which is the period during which the machine incurs the least costs for its operation. As observed, costs typically drop to a minimum around the fourth year before escalating again. Recognizing when to replace a machine can save significant resources in the long run.

Consider a car that runs best in the first few years, but after the fourth year, frequent breakdowns require more repairs, leading to increased ownership costs. Just like assessing when to buy or sell a car, thinking about machinery replacement makes economic sense based on performance longevity.

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