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A short class with Sarah and her students. The other ways are under More.
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Let's start by understanding how we convert the initial cost into an annualized cost. Can anyone tell me what the initial cost of the machinery is?
Is it ₹ 2,89,00,000?
Exactly! Now, we need to annualize this cost using a uniform series capital recovery factor formula. Who can remember what this involves?
It’s the interest rate and the number of years, right?
Correct! We use the formula: IC × [i(1+i)^n] / [(1+i)^n - 1]. For our calculation, the interest rate is 8% over 12.5 years. Can anyone calculate the annualized cost from that?
So, I think that would make the annualized cost ₹ 37,41,844.41.
Well done! This indicates how much we need to allocate annually for the initial cost.
What about the salvage value?
Great question! We'll discuss that next.
Now that we understand the annualized initial cost, let’s talk about the salvage value. Can one of you recall what salvage value means?
Is it the value we expect to receive from the machine once it has completed its useful life?
Exactly! For our machinery, the salvage value is 20% of the initial cost. How would you calculate that?
It would be ₹ 2,89,00,000 × 0.2 = ₹ 57,80,000.
Right! Now we need to convert this salvage value into an annual cost using the uniform series sinking fund factor formula. Anyone know how to do that?
We divide the salvage value adjusted for the interest rate and lifespan, similar to before!
Correct, and if we calculate it, we find it to be ₹ 2,85,968.88 annually.
So how does this factor into our total operating cost?
We'll be building on that! Let's discuss hourly depreciation next.
Now let’s calculate hourly depreciation. Remember, we take the total cost and subtract the salvage value before dividing by the annual hours of usage. Can anyone put that into the formula?
So, we take ₹ 37,41,844.41 minus ₹ 2,85,968.88 divided by 1600 hours?
Exactly! What do you get when you compute that?
It comes out to ₹ 2159.92 per hour.
Correct again! Now, moving on to ownership costs, let’s calculate insurance and taxes based on the initial cost. Who can tell me how to find the insurance cost?
Isn’t it 2% of the initial cost per hour? So, ₹ 2,89,00,000 × 0.02 divided by 1600?
Absolutely! And what about the taxes?
It would be 3%, so we would do the same calculation!
Perfect! Now, when we add everything up, what do we get as total ownership cost?
Next, let’s estimate fuel and consumable costs. What do you think the fuel consumption factor is based on operating conditions?
That would depend on the horsepower and adjusted factors based on the load, right?
Exactly! With an operating factor of 0.5 and a horsepower of 250, we multiply that by 0.14 liters per horse power per hour. What do we get?
That means we consume 17.5 liters per hour!
Correct! Now multiply that by the fuel cost per liter to get the hourly fuel cost.
If the cost is ₹ 65 per liter, that’s ₹ 1137.50 per hour.
Great job! Now we add this to the total ownership costs to find the full operating cost.
Finally, we synthesized all operational costs to find our total cost. Can anyone summarize what our total calculated cost per hour is?
It should be ₹ 5759.20 per hour when we add everything!
Well done! Now, just so everyone understands, how do methods like the Caterpillar method differ from this calculation?
The Caterpillar method uses average annual investment, while our method uses actual timed cash flows!
Exactly! It’s important to understand the implications of each method as companies will choose based on policy.
So, it ultimately comes down to business decisions!
Correct! Let’s summarize today’s lessons as we wrap up. We learned how to break down every component to obtain total operating costs effectively.
The upfront investment needed for acquiring machinery or equipment, which will be capitalized and subsequently annualized to manage financial impact over time.
A calculated figure that spreads the initial cost over the machine's useful life, presenting it as an annual expense for easier handling of cash flows.
The anticipated residual value of an asset once its useful life concludes, which can be factored into overall cost calculations.
Reflecting loss in value over time, depreciation provides insights into how much value an asset loses and impacts financial reporting.
Additional costs incurred beyond the initial purchase, including insurance, taxes, and maintenance expenses.
Adjusts the fuel consumption based on actual working conditions and usage instead of theoretical maximum outputs.
An initial cost of ₹ 2,89,00,000 with an annual interest rate of 8% results in an annualized cost of ₹ 37,41,844.41 over 12.5 years.
A 20% salvage value on the initial cost results in ₹ 57,80,000, annualized to ₹ 2,85,968.88 using the uniform series sinking fund factor.
Hourly depreciation calculated as (Annualized Initial Cost - Annualized Salvage Value) / Annual Hours Results in ₹ 2159.92.
Operating costs including insurance at 2% and taxes at 3% of the initial cost yield additional hourly expenses of ₹ 361.25 and ₹ 541.88 respectively, culminating in a total hourly ownership cost of ₹ 3063.05.
To keep it alive, and not in a box, base costs on the wreck, keep the salvage intact.
Imagine a machine named 'Anne' who calculates her worth yearly. She notes her wear each year, refers to her aging, and evaluates how much she will bring back when she retires.
S.A.D. for remembering key formulas: S for Salvage, A for Annualized, D for Depreciation.
Use the acronym IC for Initial Cost, SC for Salvage Cost for remembering component names.
Term
Initial Cost
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Term
Salvage Value
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Term
Annualized Cost
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Term
Operating Factor
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A calculated cost that spreads the initial investment over its useful life, converting it into an annual expense.
The estimated resale value of an asset at the end of its useful life.
The reduction in the value of an asset over time, often calculated annually.
A metric that adjusts the power consumption based on real-world usage conditions.
Consumable materials needed to maintain machinery, often expressed as a cost factor.
A formula used to convert an initial investment into a series of equal annual payments, accounting for interest.
This section explains the calculation of total operating costs, focusing on the uniform annual costs, salvage value, depreciation, and other ownership costs related to machinery.
In this section, we explore how to compute the total operating costs for machinery, including initial costs, salvage value, hourly depreciation, insurance, taxes, and fuel costs. The use of the uniform annual cost method and understanding of salvage value and operating factors are central to managing machine ownership effectively.
In this section, we delve into the complexities of calculating total operating costs for machinery by converting the initial investment into an annualized format. Using the concept of uniform series capital recovery factor, the initial cost of ₹ 2,89,00,000, with an 8% interest rate and a lifespan of 12.5 years, results in an annualized cost of ₹ 37,41,844.41. Similarly, the salvage value, which is 20% of the initial cost, is annualized, yielding ₹ 2,85,968.88 per year.
Hourly depreciation is then calculated based on the difference between annualized costs and the annual usage hours of the machine (1600 hours), resulting in an hourly depreciation of ₹ 2159.92.
Further, ownership costs for insurance and taxes are included as percentages of the initial cost, leading to additional hourly costs of ₹ 361.25 and ₹ 541.88, respectively. By summing these amounts, we obtain a total hourly ownership cost of ₹ 3063.05.
Additionally, we discuss estimating fuel costs, FOG (Filter, Oil, Grease) costs, tire costs, and maintenance costs. For example, the estimated hourly fuel cost is ₹ 1137.50 after considering the hourly fuel consumption.
Finally, combining all these costs results in a comprehensive breakdown of the total operating cost of ₹ 5759.20 per hour, which reflects a thorough analysis and careful consideration of various cost factors.