3.1. Trends in Cost over Years

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 understand the downtime costs, we start by calculating the cost per hour for downtime. Given that downtime is calculated as a percentage of the equipment cost (3% here), we first find 3% of 900 rupees. This results in a downtime cost of 27 rupees per hour. Next, we calculate the yearly downtime cost by multiplying this hourly rate by the annual operating hours (2000 hours), leading to a total yearly downtime cost of 54,000 rupees for the first year.

Imagine if you were leasing a car. If you had to pay a small percentage every hour the car was out of commission due to repairs, you would want to calculate how much each hour of downtime would cost you annually. Here, the car is like the equipment, and when it's not functioning, you're losing money based on its downtime costs.

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.

Next, we calculate the downtime cost for the second year, where the downtime percentage has increased to 6%. We again find this percentage of the equipment cost: 6% of 900 rupees is 54 rupees per hour. Multiplying by the same annual operating hours of 2000, we reach a total downtime cost of 1,08,000 rupees for the second year.

Continuing with our car analogy, if the repairs on the car become more frequent and significant, leading to longer downtimes, we can compare the rising costs associated with each year of holding onto the vehicle. In this case, just as your car costs more in repairs as it ages, the machinery incurs greater downtime costs as it operates longer.

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. So, like that you keep on adding it you will get the cumulative cost.

Cumulative downtime costs are found by adding the downtime costs of each year. After calculating for the first and second years, we note 54,000 (first year) + 1,08,000 (second year) results in 1,62,000 rupees. This process continues as we add each year's downtime cost to the previous totals, so if the third year also has downtime, we would add that to reach a grand cumulative total.

Think of a savings account where you put away a set amount of money each year. Just as you add to your initial deposit every year to see how your savings grow, here you’re adding each year's downtime costs to see how they accumulate over time—all leading to an understanding of the total financial impact of holding aged equipment.

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...

Loss in productivity can have a significant financial impact. When a machine experiences downtime for repairs or maintenance, efficiency decreases, potentially leading to increased operation hours needed to meet production goals. This scenario often means incurring additional costs to restore productivity, such as running extra shifts or employing more workers.

Imagine a school during exam season. If a teacher falls ill, classes can slow down—a form of productivity loss. To get back on track, the school might need to schedule extra classes or hire substitute teachers, which can cost more money. Similarly, when machinery is down, businesses can face similar challenges leading to added expenses.

So, for the first year there is no change at all, but for the second year there is loss in productivity, 0.98. So, I want to say 40.5 is my cost per hour...

As losses in productivity are factored in, the costs to restore full productivity are calculated. This is done by dividing the class cost per hour by the productivity factor. For instance, if the cost is 40.5 and productivity is 0.98, the adjustment leads to a productivity adjusted cumulative cost of 41.33 rupees per hour for the first year and calculates similarly for subsequent years.

Let’s say you're a restaurant owner. If during peak hours, your staff can serve only 98% of customers due to slow kitchen equipment, the extra effort and possibly increased hours for your servers can be similar to the additional cost derived from lowering productivity, reflecting in your overall operation costs.

Every year your obsolescence factor is increasing as machine is becoming more obsolete...

As machines age, their obsolescence cost increases due to wear and tear and the availability of better, more efficient equipment. This leads to increased maintenance needs and lower productivity. Calculating obsolescence costs involves determining how much more it costs to retain an older machine versus upgrading to newer models.

Think of an old smartphone that is slowly becoming outdated. While it still works, the battery loses efficiency, and newer models are available with better features. Retaining the old phone could incur higher repair costs, just as retaining old machinery can lead to costs for maintenance and inefficiencies.

Now, let us summarize all the costs we have calculated so far...

Summarizing the costs provides a clear picture of how different types of costs (depreciation, maintenance, downtime, and obsolescence) change over the machine's lifespan. Notably, while some costs decrease with age (like depreciation), others, like maintenance, may increase, which can lead to a point where total costs start to rise again after a period of decrease.

Consider your monthly expenses over the years. At first, you might spend less as your lifestyle stabilizes, but over time, certain costs like repairs or new needs might start to increase. Understanding these patterns in your personal finances can help you decide when it’s time to make changes, just like with equipment management.

So, the economic life means the period during which the cost associated with the machine is minimum...

The concept of economic life refers to the timeframe in which the cumulative costs associated with operating a machine are at their lowest. This often aligns with when it is most cost-effective to replace the machine before costs rise again due to increasing maintenance, downtime, and obsolescence.

When to replace your vehicle can be thought of similarly. After years of usage, there might be a sweet spot where the vehicle is still reliable and inexpensive to maintain, but if you keep it too long, the repairs could become exorbitantly high compared to the cost of a new vehicle. Understanding your economic life for machinery helps ensure optimal financial decisions.

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