Annual and Life-to-Date Costs

摘要

The difference between annual cost and full life cycle or life-to-date (LTD) cost is one of the most difficult things to grasp when it comes to understanding equipment costs. This is due to the fact that we have been trained to focus on next year's cost and next year's budget, which causes us to take a short-term view of cost. The snag is, you buy a machine for the long term. Although next year's cost per hour is important, it is not nearly as important as the average cost per hour of owning and operating the machine throughout its full life cycle. Let's look at some numbers for an example machine to understand an LTD cost calculation (see Annual Costs table). We will use a $200,000 purchase price with an expected life of eight years. Row 4 gives the estimated residual market value percentage for the machine at the end of each year, which reflects the percentage of the original purchase price that you expect to obtain if you were to sell it in the open market. In other words, if you were to sell the machine at the end of year 3, you would expect to get 34 percent of the original purchase price. Row 5 is residual market value expected when you multiply the purchase price in row 3 by the values in row 4.