4.2. Taxes Calculation

So this IC is named equivalent to A using uniform series capital recovery factor. The initial cost is converted into equivalent uniform annual cost, annualized cost we call it as annualized initial cost using uniform series capital recovery factor. So the initial cost is nothing but your 2,89,00,000 what you have determined just now after deducting the tire cost, 2,89,00,000 lakh multiplied by your uniform series capital recovery factor which is nothing but I into 1 + i whole power n by 1 + i whole power n - 1. The interest rate you know it is nothing but 8 percent and n is 12.5 years. So you can get the annualized initial cost as 37,41,844.41 per year. So we have converted the initial cost into annualized initial cost using this uniform series capital recovery factor.

In this chunk, we were introduced to the concept of converting an initial cost into an annualized cost using the uniform series capital recovery factor. The initial cost discussed here is 2,89,00,000, which represents the total investment needed. The formula mentioned is crucial as it allows us to understand how much this large upfront cost translates to on an annual basis. By using an interest rate of 8% over a period of 12.5 years, the annualized cost is calculated and determined to be ₹37,41,844.41 per year. This means that if a company uses this investment, they should expect to treat it as an annual expense of this amount for budgeting purposes.

Imagine you buy a car for ₹2,89,00,000. Instead of thinking about the full price at once, you can think of the car as costing you about ₹37,41,844 annually over 12.5 years. This helps you plan for how much to save or budget each year as if it were an expense, which can make managing finances easier.

Now let us move on to the salvage value. So now I need to convert the future salvage value into equivalent uniform annual cost. So the salvage value will be converted into equivalent uniform annual cost. Equivalent uniform annual cost of salvage value is calculated as Salvage value × [ i/(1+i)^n - 1 ] = 0.2×2,89,00,000×[ ] = ₹ 2,85,968.88/ year. How to convert it using uniform series sinking fund factor? So hope you remember this sinking fund factor is nothing but i divided by (1 + i)^n - 1 you multiply by this salvage value.

This section explains how to convert a salvage value into an annual cost. The salvage value represents the estimated resale value at the end of an asset's useful life—in this case, it's 20% of the initial cost after depreciation. The formula for calculating the annualized equivalent uniform cost uses the sinking fund factor for this calculation. For the salvage value estimated at 20% of the initial cost, the annual equivalent is ₹2,85,968.88. This means that over the asset's life, a company should set aside this amount each year, anticipating that this is the capital they will recover from selling the asset after its useful life.

Think of it like buying a home that you expect to sell for 20% of its purchase price after a certain number of years. By calculating equivalent annual costs, you can set aside roughly ₹2,85,968.88 per year to prepare for that return when you sell the house. This is similar to saving each year for a significant future expense.

So now you can calculate the hourly depreciation. Hourly depreciation is the difference between the initial cost minus the salvage value divided by the annual use of the machine in hours. Therefore, Hourly Depreciation = (₹ 37,41,844.41 - ₹ 2,85,968.88) / 1600 = ₹ 2159.92/hr.

In this section, we see how to derive the hourly depreciation for a machine. It takes the annualized initial cost and subtracts the annualized salvage value, providing a net cost attributable to depreciation. This net value is then divided by the total annual hours the machine is expected to be used (1600 hours in this case). This gives a precise hourly cost that adds clarity to the ownership costs of the asset.

Consider you have a factory machine that costs ₹37,41,844.41 annually and can be sold for ₹2,85,968.88 when done. If it runs 1600 hours a year, your cost per hour would be similar to dividing the cost of a new machine by its lifespans, helping you to budget correctly for each operation hour.

The insurance percentage is 2% of the initial cost minus the tire cost divided by 1600 hours. Insurance = (2.0 × ₹ 2,89,00,000) / 100 / 1600 = ₹ 361.25/hr. The tax percentage is 3% of the initial cost minus the tire cost divided by the hourly usage of the machine in a year. Taxes = (3.0 × ₹ 2,89,00,000) / 100 / 1600 = ₹ 541.88/hr.

This part calculates insurance and tax costs attributable to owning the machine. The insurance is calculated at 2% of the adjusted initial cost divided by the expected yearly use, aiming to provide a clear breakdown of costs per operating hour. Similarly, taxes are computed as 3% of the same adjusted cost, yielding specific hourly rates for both insurance and taxes.

Think of paying insurance on your vehicle. Just as you would calculate the insurance premium as a percentage of the car's value each year, here we do similar calculations to reflect the costs in a way that can be compared to operating costs per hour.

Total hourly ownership cost = ₹ 2159.92 + ₹ 361.25 + ₹ 541.88 = ₹ 3063.05/hr.

The last calculation summarizes all components of owning the machine on an hourly basis. This total includes depreciation, insurance, and taxes, allowing for a comprehensive view of what it costs to own and operate the asset every hour it is in use.

It's like when you calculate your total monthly expenses for owning a car. You consider not just the loan payment (depreciation), but also insurance, registration, gas, and repairs. Here, all those ownership costs are summed up to understand the overall financial commitment per hour.

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