4.3. Total Hourly Ownership Cost

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. The initial cost is nothing but your 2,89,00,000 what you have determine 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.

To find the annualized initial cost, we take the total initial cost of 2,89,00,000 and use the uniform series capital recovery factor formula. The formula accounts for interest, which is 8%, and the lifespan of the investment, which is 12.5 years. By applying these values into the formula, we convert the large one-time initial cost into an annual payment equivalent, making it easier to manage in financial planning.

Think of this like taking a loan for a car. You can either pay the full price upfront or finance it with monthly payments. The annualized cost is similar to those monthly payments, making it easier to integrate into a budget.

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. Salvage value is nothing but 20% of the initial cost minus the tire cost. Now you substitute the value the interest rate and the useful life of the machine n = 12.5 you will get the annualized salvage value as 2,85,968.88 per year.

This part involves calculating the salvage value, which is the expected resale value of the equipment at the end of its useful life. In this case, the salvage value is 20% of the initial cost minus the cost of tires. We then convert this future value into an annualized figure, which allows us to factor in this future income when assessing total ownership costs.

Think of buying a smartphone. After usage, when you decide to sell it, you get some money back. That remaining value is equivalent to the salvage value of the phone once its useful life is over.

Hourly depreciation is the difference between the annualized initial cost and the annualized salvage value, divided by the annual use of the machine in hours.

To calculate the hourly depreciation, we subtract the annualized value of the salvage from the annualized initial cost. This gives us the total depreciable cost over a year, which we then divide by the total hours the machine is expected to be in use each year. This helps spread the cost of using the machine over its working hours, providing a clearer view of its cost per hour.

Imagine you bought a bicycle for ₹10,000 and expect to sell it for ₹2,000 after a year. The annual depreciation is the initial cost minus the future value, divided by how often you use it. If you ride it for 1,000 hours in a year, you know exactly what the bike costs you per hour of riding.

The other components of the ownership cost like insurance, taxes, and storage are calculated as a percentage of the initial cost minus the tire cost.

In addition to depreciation, there are recurring costs associated with owning and operating equipment. Insurance is commonly 2% of the initial cost minus the tire cost, calculated annually and then broken down into an hourly rate. Taxes work similarly, based on a percentage of the initial investment. These costs are critical to understanding the total cost of ownership.

Just like when you own a car, you don’t just think about its price. You also have to consider insurance, registration fees, and maintenance costs. These are like the additional costs in the ownership of equipment.

Once all components are calculated, the total hourly ownership cost is summarized as the sum of hourly depreciation, insurance, taxes, and other significant costs.

The final step involves summing all the hourly components to derive the total hourly ownership cost. This is essential for budgeting and strategic financial planning, allowing individuals or companies to evaluate the viability and affordability of their equipment over time.

It's like calculating the monthly cost of living. After adding up rent, utilities, food, and entertainment, you arrive at the total amount you spend each month, giving you a clearer picture of your finances.

--