Professional Courses
Industry-relevant training in Business, Technology, and Design to help professionals and graduates upskill for real-world careers.
Categories
Interactive Games
Fun, engaging games to boost memory, math fluency, typing speed, and English skills—perfect for learners of all ages.
Typing
Memory
Math
English Adventures
Knowledge
Enroll to start learning
You’ve not yet enrolled in this course. Please enroll for free to listen to audio lessons, classroom podcasts and take practice test.
Interactive Audio Lesson
Listen to a student-teacher conversation explaining the topic in a relatable way.
Understanding Economic Life
Unlock Audio Lesson
Today, we will talk about economic life, which is defined as the period when the costs associated with a machine are minimized. Can anyone tell me why it’s important to know this?
I think it helps us decide the best time to replace the machine.
Exactly! If we keep a machine beyond its economic life, what happens?
The costs start to increase, right?
Correct. These costs can escalate due to repairs, maintenance, and increased downtime. We want to avoid those losses!
Calculating Economic Life: Example Setup
Unlock Audio Lesson
Let’s look at our example with a track-mounted front shovel. Its purchase price is ₹35,00,000 and has an expected lifespan of 8 years. Who can explain what we’ll analyze regarding its costs?
We need to consider the depreciation, maintenance, repair costs, and how inflation affects it.
Exactly! Also, we cannot forget the salvage value at the end of its life, which is ₹7,00,000. How would you factor in inflation?
We would increase the equipment cost by ₹2,10,000 each year due to inflation.
Precisely! We are creating a comprehensive replacement analysis.
Understanding Additional Cost Factors
Unlock Audio Lesson
Now let’s discuss other costs associated with a machine as it ages. What factors should we consider?
Maintenance and repair costs increase over time.
And downtime costs too, right? The more it breaks down, the less productive it is.
Exactly! And let’s not forget about obsolescence due to newer models. So what can we conclude regarding replacement?
We conclude that waiting too long to replace a machine can lead to higher total costs!
Very well summarized!
Cumulative Cost Analysis
Unlock Audio Lesson
Let’s explore how we analyze cumulative costs as the machine’s age increases. Why is it important?
It helps us determine the cost per hour of operating the machine over its lifespan.
Correct! As a machine ages and its cumulative costs are assessed, what trend do we typically see?
The cost per hour generally decreases because the cost is spread over more hours of use!
Exactly! Thus, we gain greater insight into whether it’s time to replace.
Final Review and Key Takeaways
Unlock Audio Lesson
Let’s summarize what we’ve learned today about estimating economic life. What are the key components?
Economic life determines the lowest cost period for machine operation.
Costs increase over time, including maintenance, repair, and depreciation due to obsolescence.
And we need to calculate cumulative costs to find the optimal replacement time.
Excellent summary! Understanding these components ensures we manage resources efficiently.
Introduction & Overview
Read a summary of the section's main ideas. Choose from Basic, Medium, or Detailed.
Quick Overview
Standard
The section details economic life as the period where machine operating costs are minimized, discusses increasing costs beyond this period, and introduces the example of estimating the economic life of a track-mounted front shovel. The example emphasizes depreciation methods, inflation impacts, and relevant cost factors for replacement analysis.
Detailed
Example of Estimating Economic Life
This section delves into the concept of economic life, defining it as the duration in which the costs of operating a machine remain minimal. Beyond this time frame, owners may face escalating expenses, including higher repair, maintenance, downtime, and obsolescence costs. Such increases signal the necessity for timely replacement to avoid losses.
To illustrate this, the section provides a detailed example of estimating the economic life of a track-mounted front shovel. Key figures include:
- A purchase price of ₹35,00,000
- A lifespan of 8 years with a double declining balance method for depreciation
- A salvage value of ₹7,00,000 after 8 years
- Annual cost increases of ₹2,10,000 attributed to inflation and a 15% investment cost.
The section also discusses the importance of calculating various associated costs, including maintenance, repair, downtime, and obsolescence, emphasizing how these aspects evolve as the machine ages. Following this, the replacement analysis is developed through cumulative calculations, enabling operators to determine the most financially prudent moments for machine replacement.
Audio Book
Dive deep into the subject with an immersive audiobook experience.
Understanding Economic Life
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
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.
Detailed Explanation
Economic life refers to the period during which a machine operates efficiently with minimal holding costs. Once this period ends, costs such as repairs, maintenance, and obsolescence start accumulating, making it costly to keep the machine. Therefore, understanding the economic life helps in knowing the optimal time to replace machinery to avoid unexpected losses and rising costs.
Examples & Analogies
Think of a car that you own. In the first few years, the car runs smoothly and requires minimal maintenance. After several years, repairs begin to pile up, and it experiences more breakdowns. Eventually, it may become more expensive to maintain than to buy a new one. That optimal period before repairs increase rapidly is similar to the economic life of a machine.
Estimating Economic Life: Case Study of a Track Mounted Front Shovel
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
In this example, we are going to see how to estimate the economic life of the machine. So, basically, 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 double declining balance method. So, we are going to follow double declining balance method to estimate the depreciation. And at the end of the 8 years you will be able to sell the machine at the cost of rupees 7,00,000. That means the salvage value of the machine is 7,00,000.
Detailed Explanation
Here, we’re examining a specific example of a track mounted front shovel valued at 35 lakh. The machine can be effectively used for 8 years, during which it will depreciate using the double declining balance method. At the end of its life, the expectation is to sell it for a salvage value of 7 lakh. This understanding of purchase price, duration of use, and salvage value is crucial in calculating the total economic life.
Examples & Analogies
Imagine buying a computer for your business. If you expect it to last for 5 years and it costs $1,000, and you can sell it for $200 after that, you can calculate how much value the computer provides to your business each year, helping you decide whether to upgrade or keep using it.
Inflation and Annual Cost Increase
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
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.
Detailed Explanation
Inflation affects everything, including equipment costs. In this example, a 6% annual inflation rate causes the machine's cost to increase by about 2,10,000 each year. This factor must be considered when evaluating whether to keep the machine or replace it because it adds to the overall cost of ownership.
Examples & Analogies
Consider your grocery bills. Each year, the price of items you purchase may increase due to inflation, meaning that what you could buy for $100 last year might now cost you $106. This price increase must be factored into your budget, just like increased costs for machinery must be factored into business decisions.
Calculating Costs Involved in Ownership
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
So, we have to estimate the economic life of this machine. For calculating the hourly maintenance and repair cost, downtime cost, and obsolescence cost of the machine, we have to use the following values and the equipment cost is given approximately as rupees 900 per hour.
Detailed Explanation
To determine the total cost of ownership of the machine, one must calculate various factors including maintenance, repair, downtime, and obsolescence costs. The costs can be broken down into an hourly rate, which in this case is approximately 900 rupees per hour. Accurately estimating these costs is essential for informed decision-making about equipment replacement.
Examples & Analogies
If you own a bicycle, you might think about the costs of maintenance (like tires or brakes), since it might cost you a few dollars each time. Keeping track of these small costs can help you determine whether to keep repairing your old bicycle or save up for a new, more efficient model.
Importance of Downtime and Obsolescence
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Downtime is nothing but the unavailability of your machine for the productive work. So, it may be either due to the breakdown of the machine. As I told you, when the machine is not available for productive work, you will be facing some loss in productivity. The obsolescence cost is also important as the age of the machine increases, it becomes obsolete. There may be different reasons for the 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.
Detailed Explanation
Downtime refers to the periods when the machine is non-operational, causing lost productivity and increased costs. Additionally, a machine may become obsolete due to technological advancements or changing market demands, requiring new investments to maintain competitiveness. Understanding these factors helps inform decisions about whether to keep or replace machinery.
Examples & Analogies
Imagine running a bakery with an oven that breaks down frequently. Each time it does, you can’t bake and lose customers. Similarly, if a newer oven exists that bakes faster or with better quality, your old oven may become less valuable, necessitating a replacement to avoid losing business altogether.
Calculating Depreciation Over Time
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
So, now let us work out the cost associated with the machine from the replacement analysis perspective. First we are going to estimate the depreciation and the replacement cost associated with this machine. The initial cost of the truck is 35,00,000 and the annual increase in the cost you can see that it is 2,10,000 every year, due to the inflation.
Detailed Explanation
To analyze the replacement costs effectively, it is crucial to understand how depreciation affects the machine's value over time. Initially valued at 35 lakh, this truck will not only depreciate but also incur additional replacement costs yearly due to inflation. This highlights the importance of adjusting financial forecasts to reflect changing asset values.
Examples & Analogies
Think of a smartphone. When you buy it for $800, its value decreases over time due to use and newer models being released. If you look to sell it a few years later, its market value will include depreciation and any new costs of similar models you might consider buying.
Loss on Replacement Analysis
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Now, what is the loss associated with the replacement? As I told you, due to inflation, there is an increase in costs every year. For instance, at the end of the first year, the book value is 26,25,000... loss on replacement.
Detailed Explanation
When considering replacing a machine, it is essential to calculate the financial loss incurred from replacement. For example, if you wait until the end of the first year, after accounting for inflation and depreciation, you might find you're losing out. Evaluating losses helps in making timely decisions about replacements.
Examples & Analogies
If you sell your old car just after the mechanic tells you it will need expensive repairs, the money you get from its sale may not cover the costs of a newer model. Identifying the right time for replacement can prevent unnecessary losses.
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
-
Economic Life: The timeframe where operating costs are minimized.
-
Depreciation: The decrease in asset value over time, impacting economic life estimation.
-
Replacement Analysis: A strategy to determine when a machine should be replaced to minimize costs.
-
Cumulative Costs: Total costs of equipment broken down by hours of operation.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
-
An example includes a track-mounted front shovel, which has a purchase price of ₹35,00,000 and an estimated economic life of 8 years. Cumulative costs are assessed annually to determine optimal replacement.
-
The method of double declining balance is outlined for depreciation calculation, crucial for understanding loss of equipment value over time.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
🎵 Rhymes Time
-
If a machine's costs you don't want to swell, replace it before its economic bell!
📖 Fascinating Stories
-
Imagine a farmer with an old tractor that spends more time in repair than in the field. If he replaces it before those costs rise too high, he can maximize profit just like a business.
🧠 Other Memory Gems
-
R.E.M. - Remember: Replace Early for Maximum profit; don’t wait for high age costs.
🎯 Super Acronyms
C.O.R.E. - Cumulative, Operating, Repair, Economic life helps remember key cost factors.
Flash Cards
Review key concepts with flashcards.
Glossary of Terms
Review the Definitions for terms.
-
Term: Economic Life
Definition:
The period during which the costs associated with operating a machine are minimized.
-
Term: Depreciation
Definition:
The reduction in the value of an asset over time due to wear and tear.
-
Term: Replacement Cost
Definition:
The cost associated with replacing a machine or equipment after it has exceeded its economic life.
-
Term: Obsolescence Cost
Definition:
Costs incurred due to the machine becoming outdated or less efficient compared to newer models.
-
Term: Cumulative Cost
Definition:
The total cost accumulated over the period of machine usage.