5.2. Cumulative Maintenance Costs

Economic life means it is a time during which the cost of holding the machine will be minimum. So, beyond the economic life, there will be increasing costs associated with the machine, either due to an increase in the operating cost that is repair and maintenance costs or increase in downtime costs or increasing obsolescence cost.

The economic life of a machine refers to the duration during which it is most cost-effective to operate it. After this point, the costs begin to rise significantly due to various factors. These factors can include increased maintenance and repair costs as the machine ages, greater downtime due to failures or inefficiencies, and obsolescence, which refers to the machine becoming outdated due to advancements in technology or changes in market demand.

Think of a smartphone. When you first buy it, the operating costs (such as battery life and software updates) are low. However, as it gets older—say after three years—you might find that the battery drains faster (repair costs) and that newer models offer features you wish you had (obsolescence). At some point, it may make more financial sense to purchase a new phone rather than keep repairing the old one.

All these things will be resulting in the shooting up of your total cost of the machine. So, which is not desirable; that is why, when the costs are meaning of itself, we should try to replace the old machine with the new machine, so that we do not enter into loss.

As the machine ages, costs associated with its upkeep can accumulate significantly. This total cost includes maintenance, repairs, and obsolescence. To avoid increasing expenses that exceed the benefits of using the older machine, it is more economical to replace it with a newer model that would incur lower operational costs.

Imagine your car. Over time, the repairs become more frequent and expensive. At a certain point, it's cheaper to buy a new car than to continue spending money on repairs for the old one. This decision is similar to choosing when to replace an old machine.

In this example, we are going to see how to estimate the economic life of the machine. So, here we are going to estimate economic life for a track mounted front shovel. The purchase price is 35,00,000. So, the machine is expected to last for 8 useful years, and the depreciation is assumed to follow the double declining balance method.

In this example, the economic life of a specific machine, a track-mounted front shovel, is being evaluated. The initial purchase price is given, and it is expected to last for eight years. The chosen method for calculating depreciation—double declining balance—means that more value will be deducted in the earlier years than later years, reflecting how most machines depreciate quickly in their initial years.

Consider your own belongings, like a laptop. When you first buy it, it may depreciate rapidly due to new models coming out, much like the shovel in this example. As ages increase in a gadget's lifecycle, its value drops more slowly, similar to a car that’s aged for several years.

Due to inflation, you can see that the annual increase of the average cost of the equipment is approximately 6%. That means, the machine cost is going to increase by 2,10,000 every year due to the effect of inflation.

Inflation impacts the cost of equipment over time. In this case, the cost of the machine is expected to increase by 6% yearly, translating to an additional 2,10,000 rupees annually. This increasing cost should be factored into the decision to replace older equipment, as waiting longer can lead to higher initial capital outlay for a new machine.

Imagine you're saving money for a tablet that costs $300 today. If inflation is 6$318 next year. If you purchase it now, you save money compared to waiting until next year.

Now, let's find the cumulative use of the machine every year; the machine is being used for 2000 hours. So you find the cumulative use of the machine say for the second year, 2000 + 2000 it is 4000, for third year 4000 + 2000 it is 6000.

Calculating cumulative usage helps in analyzing the efficiency of the machine over time. Since the machine is used for 2000 hours annually, by the end of the second year, it totals 4000 hours, and by the end of the third year, this will rise to 6000 hours. This cumulative figure is essential to assess overall operational performance and related costs.

Think of a ride-sharing app. If you drive 20 hours a week, after a year, you’ll have logged over 1000 hours. That cumulative data is key to understanding how much wear and tear is accumulating on your vehicle and when you might need to replace it.

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