5.3. Downtime Costs Calculation

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

Economic life refers to the duration that a machine remains efficient in terms of cost management. It’s important to evaluate this period because after the economic life, costs typically rise. These increased costs can stem from repairs, maintenance, downtime, or the machine becoming outdated. Effective management includes planning for a replacement before these costs outweigh the benefits.

Imagine a car that you purchased. Initially, the car runs efficiently and requires minimal maintenance. However, as it ages, it needs more repairs, may break down more often, and can start to feel outdated compared to newer models. Continuing to drive this car can become more expensive, much like how a machine incurs higher costs as it surpasses its economic life.

In this example, we are going to see how to estimate the economic life of the machine. So, basically, 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 double declining balance method.

The example sets the stage for calculating the economic life of a specific machine, a track-mounted front shovel worth 35,00,000. The machine's lifespan is expected to be 8 years. The double declining balance method is specified for depreciation, meaning the value of the machine will decrease significantly in the early years and then taper off gradually over its life.

Consider a smartphone that costs 35,000. Initially, it might depreciate quickly, losing a significant amount of its value in the first year due to fast technological advancements. The double declining balance method reflects this by allocating higher depreciation costs initially, just like how a smartphone loses value more rapidly early on.

Due to inflation, you can see that 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 affects the cost of equipment; here, it's expected that the average cost of the machinery will rise by about 6% each year, translating to a 2,10,000 increase annually. This has to be taken into account when evaluating the total cost of ownership over the machine's life, as it affects the decision of when to replace the machine.

Think about buying a loaf of bread for $2 today. If inflation is around 6$2.12 next year. Over time, consistent increases like this can accumulate, making it essential for businesses to factor inflation into their long-term planning.

For calculating the hourly maintenance and repair cost, downtime cost and the obsolescence cost of the machine, we have to use the following values and the equipment cost is given approximately as rupees 900 per hour.

To effectively assess the costs associated with machine operation, several components must be considered: hourly maintenance and repair costs, downtime costs, and obsolescence costs. In this scenario, the equipment is said to incur about 900 rupees per hour, which entails all costs related to keeping the machine operational.

Imagine running a small bakery. Every hour, you need to consider various costs: ingredients, electricity, labor, and maintenance of your ovens. Just like calculating these hourly costs ensures you price your items accurately, businesses must carefully account for machine costs to maintain profitability.

And another thing I hope you remember what is downtime? Downtime is nothing but the non availability of your machine for the productive work. It may be either due to the breakdown of the machine. So, mostly it is due to the breakdown of the machine, machine may be spending its time in the repair yard and it will not be available for the productive job.

Downtime represents the time during which a machine is not operational and cannot contribute to productivity. Significant downtime often arises from machine breakdowns, resulting in lost business opportunities and increased costs due to necessary repairs. Understanding and minimizing downtime is crucial for cost-effective operations.

Picture a restaurant that has broken kitchen equipment. If the oven is down for repairs, no meals can be baked, leading to lost sales. This period of downtime costs the restaurant money, just like a construction machine that cannot work when it breaks down.

Another thing to be noted is the obsolescence cost is also important as the age of the machine increases, it becomes obsolete you know that. So, there may be different reasons for obsolescence either due to technological obsolescence, that is due to wear and tear, its productivity may get reduced, or it may be even due to market obsolescence.

Obsolescence costs reflect the loss of value as machines become outdated or inefficient compared to newer models. This may occur due to wear and tear or advancements in technology that render older machines less capable, thereby decreasing productivity or attractiveness in the market.

Think of a computer that once was cutting-edge technology but is now slow and unable to run newer programs. This computer's value declines over time as users prefer faster, more efficient models. In business, companies face similar obsolescence issues with their equipment.

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