Economic Life

The best way to determine whether the equipment is operating on a profitable basis is by keeping accurate records of the rate of depreciation and repairs. For cost-keeping purposes, it is general practice to estimate in advice an hourly rate for each equipment, based on past experience. Though this is at best a good guess; the rate of depreciation and repairs 'and  its relationship to production is actually a variable during the life time of the equipment and therefore requires close attention. Figure shows a graphical method employed for observing the change in hourly rate and the economic life of an equipment. 

In the example, the equipment was Rs 10,000, when new. In the beginning, the repairs were low but with the passage of time the repair cost curve went up at a faster rate. At 10,000 to 12,000 hr the hourly rate became stabilised at a minimum if Rs 2.40 per hr, somewhat below the estimated Rs 2.50 rate per hr. Later, the repair expense and downtime are indicated to be at a higher rate and the equipment is now entering into its uneconomical life zone. The Rs. 2.40 average rate can thereafter only be secured by a new unit, or might even be bettered by a new improved unit. The time for considering replacement or trade-in has arrived, in-so-far as operating conditions govern. There may be other factors such as lack of new capital or interest charges which might justify continued operation for a limited period of time. If a contractor keeps this kind of information for each piece of important equipment he has an exact record of the condition and status of his machinery.