Tutorial 3 - Maintenance Strategies and Replacement & Depreciation Models Flashcards
How are the cumulative maintenance costs calculated?
Cumulate all maintenance costs up to the current year.
How is depreciation calculated?
Take the initial cost of the asset and subtract the current years re-sale value.
How is total cost calculated?
Cumulative (maintenance) cost + Depreciation
How is annual cost calculated?
Annual cost = total cost / current year no.
How is the year-on-year cost difference calculated?
(Current years annual cost - Previous years annual cost) x No. of years
How is the optimum year of asset replacement decided?
At the point where the ‘year-on-year cost difference’ transitions from negative to positive.
It is typically a period, for example between years 4-5.
Why is asset depreciation important to an organisation?
Equipment counts as a fixed asset and will therefore affect the rate of capital employed (ROCE) financial ratio. This will affect a company’s performance measures.
This highlights a need for accurate and well forecast financial estimates, as well as real-time tracking of assets in operation.
What are the advantages of being conservative when estimating maintenance costs?
If the company budgets for high maintenance costs they should be in a position to pay for them should they occur.
What are the disadvantages of being conservative when estimating maintenance costs?
Budgeted money is not available for other business opportunities in the meantime and may go unspent if the conservative forecast does not come to fruition.
Explain how certainty of optimum year replacement can be increased after asset operation has commenced.
- Tracking maintenance costs each year allows company’s to update their estimates.
- New forecasts can be made for the optimum year of replacement based on expected and conservative scenarios.
- This may highlight and free up budgeted money for maintenance to be spent elsewhere, or it may highlight that a new budget is required from other funds.
