Determination of economic life of an asset
Determination of Economic Life of an Asset
Any
asset will have the following cost components:
Capital
recovery cost (average first cost), computed from the first cost (purchase
price) of the machine.
Average
operating and maintenance cost (O & M cost)
Total
cost which is the sum of capital recovery cost (average first cost) and average
maintenance cost.
Capital Recovery cost
Capital
recovery cost has two components. (i) Initial cost or first cost (ii) Salvage
value at the time of disposal. Generally, a machine becomes older; its salvage
value becomes smaller. When the salvage value becomes less than the initial
cost, the capital recovery cost is a decreasing function of the life of the machine.
Operating cost
Operating
cost of a machine includes the following cost. (i) Operating cost (ii)
Maintenance cost (iii) Labour cost (iv) Material cost (v) Energy consumption
cost etc. Generally operating cost or annual equivalent operating cost of asset
is increasing with its age.
Total cost
Total
cost or annual equivalent cost of an asset is the summation of capital recovery
cost of the asset and the annual equivalent operating cost of the asset.
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| Economic life of an asset |
The economic service life
of an asset is defined to be the useful life period that minimizes the annual
equivalent of purchasing and operating the asset.
